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Why the Oil Rig Count Could Concern Energy Investors

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Apr. 3 2018, Updated 12:35 p.m. ET

The oil rig count

In the week ending March 30, 2018, the oil rig count fell by seven to 797.

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

In February 2016, US crude oil fell to the lowest closing level in the last 12 years. Since February 2016, US crude oil active futures have gained 140.4%. The oil rig count made a 6.5-year low of 316 in May 2016. Between May 27, 2016, and March 30, 2018, the oil rig count rose ~252.2%. The large increase in the oil rig count increased US crude oil’s weekly production by 19.4% between May 27, 2016, and March 23, 2018.

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More upside in US crude oil production?

In the week ending March 23, 2018, US crude oil production was at 10.43 MMbpd (million barrels per day)—a new weekly record level based on the EIA’s data. US crude oil active futures were at a three-year closing high of $66.14 per barrel on January 26, 2018. So, the oil rig count could rise until at least July 2018. Possible upside in the oil rig count could help US crude oil production rise more—a concern for oil bulls and energy investors.

Impact on 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), Murphy Oil (MUR).

Whiting Petroleum, Diamondback Energy, and Murphy Oil rose 66.7%, 80.1%, and 57.4%, respectively, during this period. The Vanguard Energy ETF (VDE) and the Fidelity MSCI Energy ETF (FENY) track energy stock indexes. VDE and FENY have gained 21.7% and 19.5%, respectively, since February 2016.

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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