The oil rig count
The oil rig count was unchanged at 738 in the week ended November 17. But since the rise by nine active rigs in the week ended November 10, US crude oil prices rose only 0.2%. Any rise in the oil rig count would be a red signal for oil prices—pointing to increased oil supply in the future.
A pattern to watch
US crude oil prices and rig counts move in a broad pattern—oil prices and rig counts’ tops and bottoms happen to be three to six months apart. For example, oil prices fell to their 12-year low in February 2016. The oil rig count fell to its lowest level in the last 6.5 years in May 2016. US crude oil prices have now recovered more than twofold since its 12-year low. The oil rig count has also doubled since its low of 316 in May 2016.
US crude oil production rose 10.4% since May 2016. So oil rigs would serve as an important indicator for US crude oil production. More importantly, high oil prices could be their own undoing.
US crude oil prices closed at their highest 2007 closing price on November 6. Based on the same pattern, oil rig counts could hit a new three-year high before May 2018. So any possible upside in oil rig counts could spoil the bullish prospects of oil prices.
Given the above pattern, investors could find their returns in ETFs like the Fidelity MSCI Energy ETF (FENY) and the Energy Select Sector SPDR ETF (XLE) turning into the red if the oil rig count keeps rising. Broader market indexes like S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) could also take some of the pain of the rising oil rig count.