US Crude Oil Rigs Approach a Two-Month Low—What’s Next?

US crude oil rig count

Baker Hughes, a GE company (BHGE) published its US crude oil rigs report on July 20. It reported that US crude oil rigs fell by five to 858 from July 13 to July 20. Rigs were near the lowest level since May 18. However, rigs have risen by 94 (~12.3%) from a year ago.

Active WTI crude oil futures were up ~60.0% since June 21, 2017. The iShares US Oil Equipment & Services ETF (IEZ) has risen ~11.0% since June 21, 2017. IEZ has exposure to oilfield equipment and services stocks.

US Crude Oil Rigs Approach a Two-Month Low—What’s Next?

Active WTI crude oil futures decreased 1.0% to $70.46 per barrel from July 13 to July 20. IEZ fell 3.2% during the same period. Rowan Companies (RDC), Ensco (ESV), Diamond Offshore Drilling (DO), and TETRA Technologies (TTI) fell 12.5%, 10.4%, 10.1%, and 8.9%, respectively, from July 13 to July 20.

These stocks were among the top percentage underperformers in IEZ’s holdings during this period. These stocks account for ~6.1% of IEZ’s holdings.

Peaks and lows

US crude oil rigs reached a record high of 1,609 in October 2014. In contrast, rigs hit 316 on May 27, 2016, which was the lowest level since the 1940s.

EIA’s monthly drilling report 

The EIA (U.S. Energy Information Administration) estimates that the US crude oil output would rise in the seven shale regions by 143,000 bpd (barrels per day) to 7.47 million bpd in August compared to July.

During this period, the US crude oil output is expected to rise primarily in the Permian and Eagle Ford shale regions. The expectation of a rise in production could pressure Wcrude oil prices.

Impact 

Active WTI oil futures have dropped ~10.0% since July 3. US crude oil rigs were near a two-month low for the week ended July 20. A further drop in oil prices could decelerate oil drilling and production activity.

However, crude oil prices are expected to end 2018 on a high note, which could see rigs rise in the upcoming months. However, higher rigs could increase US crude oil production and eventually weigh on oil prices.

Next, we’ll cover hedge funds’ net long positions in WTI crude oil.