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Is the Oil Rig Count Signaling Another Fall in Oil Prices?

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Oil rig count

On July 16, US crude oil August futures fell 4.2% and settled at $68.06 per barrel—their lowest closing level since June 21. In the week that ended on July 13, the oil rig count was unchanged from the previous week and stood at 863.

The number of active rigs has held at its highest level in more than three years. The US oil rig count tends to follow US crude oil prices with a three- to six-month lag.

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In February 2016, US crude oil fell to its lowest closing level in 12 years. Between February 11, 2016, and July 16, 2018, US crude oil active futures gained 159.7%. The oil rig count reached a 6.5-year low of 316 in May 2016. Between May 27, 2016, and July 13, 2018, the oil rig count rose ~173.1%. Between May 27, 2016, and July 6, 2018, US crude oil production rose ~24.8%.

Is there more upside in the oil rig count?

On June 29, US crude oil active futures settled at $74.15 per barrel—the highest closing level for active US crude oil futures since November 24, 2014. Based on the pattern discussed above, the oil rig count could keep rising until at least November.

In the week that ended on July 6, US crude oil production was at a record level of 10.9 million barrels per day. If production keeps surging as rigs rise, it should eventually pressure prices lower.

Oilfield service stocks

Since February 11, 2016, the VanEck Vectors Oil Services ETF (OIH) has risen 18.6%. Schlumberger (SLB), Halliburton (HAL), Transocean (RIG), and Baker Hughes, a GE company (BHGE) had returns of -2%, 56.1%, 52.1%, and 16.7%, respectively. These four stocks account for ~44.0% of the holdings in OIH. The oilfield service subindustry could benefit from rising US drilling activity.

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