What US Crude Oil Production Could Mean for Oil Prices



The US oil rig count

In the week ended September 22, 2017, the US oil rig count fell by five rigs to 744. For the past six weeks, there has been no rise in the US oil rig count.

In fact, the oil rig count has fallen for in the past three weeks—the longest declining streak since the multiyear low of 316 in the week ended May 27, 2016.

US crude oil production 

Over the past decade, US crude oil prices’ tops and bottoms were between three and six months ahead of those of the US oil rig count. In February 2016, US crude oil prices fell to a 12-year low.

From its 12-year low, US crude oil (UCO) (OIIL) (USL) active futures have now risen 97.9%, while the US oil rig count has now more than doubled since May 27, 2016. During this period, US crude oil production has risen 8.9%.

If the above pattern sustains, the US oil rig count could have topped in August 2017. In the week ended August 11, 2017, the oil rig count reached 768—a two-year high. US crude oil prices had settled at a 2017 high in February 2017.

Limited upside?

The upside for US crude oil production could be limited due to the stalled US oil rig count, and rig efficiency or new-well oil production per rig could fall as much as 1.7% in October 2017, compared with the previous month.

Energy ETFs like the Fidelity MSCI Energy ETF (FENY) and the Energy Select Sector SPDR ETF (XLE) could be positively impacted by these dynamics.

Remember, US crude oil production reached 9.61 million barrels per day in the week ended June 5, 2015–just 1% above the latest US crude oil production level. At that time, the US oil rig count was 13.7% below the current US oil rig count, and so the fall in the US oil rig efficiency could be a bullish factor for oil prices.

However, the recent bullishness in crude oil prices could also mean a renewed upturn in the rig count, which would likely be followed by higher crude oil production. What remains unclear is how long the current bull market in crude oil prices can last.

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