US Oil Production: Is It a Drag or a Pull for Oil Prices?

The oil rig count

The oil rig count rose by six to 750 for the week ended September 29, 2017. It was the first rise in six weeks. Compared to the same period in the last year, the oil rig count has risen 76.5%. However, US crude oil prices rose only 3.3% on a year-over-year basis.

US Oil Production: Is It a Drag or a Pull for Oil Prices?

Understanding an important pattern

In the last decade, US crude oil (DBO)(UCO)(USL) prices’ highs and lows were three to six months, respectively, ahead of those of the US oil rig count. On February 11, 2016, US crude oil futures were at a 12-year low. The oil rig count fell to a multiyear low of 316 in the week ended May 27, 2016.

From its 12-year low, US crude oil futures recovered 92.4%. The oil rig count has more than doubled since May 27, 2016, and contributed a 9.3% rise in US crude oil production.

Is US crude oil’s production upside limited?

On February 23, 2017, US crude oil futures rose to their highest closing price in 2017. By applying the above pattern, the oil rig count should have topped out by August 2017.

In the week ended August 11, 2017, the oil rig count was at a more-than-two-year high of 768. The rig count rose for the first time in six weeks in the week ended September 29. The stalling of the rig count could mean that crude oil production could also stall.

Moreover, the rig efficiency, or new-well oil production per rig, also slipped. On a month-over-month basis, it could fall 1.7% in October 2017.

In our view, these factors could help support oil prices above the $50 mark. US crude oil above the $50 level could benefit energy ETFs such as the Fidelity MSCI Energy ETF (FENY) and the Energy Select Sector SPDR ETF (XLE).