21 Aug

Oil Rigs Might Limit Oil’s Upside

WRITTEN BY Rabindra Samanta

Oil rig count

In the week ending on August 17, the oil rig count was unchanged at 869—the highest level since the week ending March 6, 2015. The oil rig count stayed above the range of 858–863. The oil rig count was in this range between May 25 and August 3.

Oil Rigs Might Limit Oil’s Upside

The US oil rig count tends to follow US crude oil prices with a three to six-month lag. In February 2016, US crude oil prices fell to the lowest closing level in 12 years. Between February 11, 2016, and August 20, 2018, US crude oil active futures rose 153.5%. The oil rig count reached a 6.5-year low of 316 in May 2016. Between May 27, 2016, and August 17, 2018, the oil rig count rose ~175%. Between May 27, 2016, and August 10, 2018, US crude oil production rose ~24.8%.

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 we discussed above, the oil rig count could keep rising until at least November.

US crude oil production

In the week ending on August 10, US crude oil production was at 10.9 MMbpd (million barrels per day)—0.1 MMbpd below the record level. On June 1–August 10, US crude oil production was almost in the range of 10.8 MMbpd–11 MMbpd. Last week, the oil rig count stayed at its 3.5-year high, which might stimulate US crude oil production—a factor that might limit oil’s upside.

Oilfield service stocks

Since February 11, 2016, the VanEck Vectors Oil Services ETF (OIH) has risen 11%. Schlumberger (SLB), Halliburton (HAL), Transocean (RIG), and Baker Hughes, a GE Company (BHGE), have seen returns of -7.7%, 40.3%, 30%, and 15.5%, respectively. These four stocks account for ~44.0% of OIH’s holdings. The oilfield service subindustry could benefit from rising US drilling activity.

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