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Will There Be More Upside in the Oil Rig Count?

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Oil rig count

In the week ending May 4, the oil rig count rose by nine to 834—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 May 7, 2018, US crude oil active futures gained 169.9%. The oil rig count made a 6.5-year low of 316 in May 2016. Between May 27, 2016, and May 4, 2018, the oil rig count more than doubled.

Between May 27, 2016, and April 27, 2018, US crude oil production rose 21.6%. More gains in the oil rig count could cause another rise in US crude oil production.

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More upside in the oil rig count?

On May 7, US crude oil June futures rose 1.4% and settled at $70.73 per barrel—the highest closing level for US crude oil active futures since November 26, 2014. So, the oil rig count could rise until at least October 2018—based on the pattern discussed above. In the week ending April 27, US crude oil production was at a record level of ~10.62 MMbpd (million barrels per day) based on the EIA’s weekly data on May 2.

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 May 7, 2018, Whiting Petroleum, Diamondback Energy, and Murphy Oil’s stock prices rose 129.4%, 91.8%, and 98.1%, respectively. The Vanguard Energy ETF (VDE) and the Fidelity MSCI Energy ETF (FENY) track energy stock indexes. VDE and FENY have gained 37.1% and 34.7%, 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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