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Oil Rig Count: Is More Upside Possible?

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The oil rig count

In the week ending April 20, the oil rig count rose by five to 820—the highest level in more than three years.

US crude oil prices and the oil rig count usually move in a pattern. Oil prices lead the moves in rigs by three to six months. The above graph illustrates the pattern.

In February 2016, US crude oil fell to the lowest closing level in the last 12 years. Between February 11, 2016, and April 23, 2018, US crude oil active futures rose 161.9%. The oil rig count made a 6.5-year low of 316 in May 2016. Between May 27, 2016, and April 20, 2018, the oil rig count more than doubled. Between May 27, 2016, and April 13, 2018, US crude oil production rose 20.7%. More gains in the oil rig count could cause another rise in US crude oil production.

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Why the oil rig count could rise more

On April 23, US crude oil June futures rose 0.4% and settled at $68.64 per barrel—the highest closing level for US crude oil active futures in more than three years. So, the oil rig count could rise until at least September 2018. In the week ending April 13, US crude oil production was at a record level of 10.54 MMbpd (million barrels per day) based on the EIA’s weekly data on April 18.

Energy stocks and ETFs

Since February 2016, US crude oil prices and US crude oil production have increased, which could have boosted oil-weighted stocks’ revenue like Whiting Petroleum (WLL), Diamondback Energy (FANG), and Murphy Oil (MUR).

Between February 11, 2016, and April 23, 2018, Whiting Petroleum, Diamondback Energy, and Murphy Oil’s stock prices rose 102.2%, 88.9%, and 91.5%, respectively. The Vanguard Energy ETF (VDE) and the Fidelity MSCI Energy ETF (FENY) track energy stock indexes. VDE and FENY have gained 36.4% and 34.1%, respectively, during this period.

Any downturn in oil prices due to rising US crude oil production could have a negative impact on energy stocks and energy ETFs.

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