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Why Oil Rigs Might Help Oil Prices Rebound

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Oil rig count

In the week ended September 7, the oil rig count fell by two to 860, nine less than its 3.5-year high.

The US oil rig count tends to follow US crude oil prices with a three-month 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 September 7, 2018, US crude oil active futures rose 157.7%. The oil rig count reached a 6.5-year low of 316 in May 2016. Between May 27, 2016, and September 7, 2018, the oil rig count rose ~172.2%. Between May 27, 2016, and August 31, 2018, US crude oil production rose ~25.9%.

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More upside in the oil rig count?

On June 29, 2018, 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 saw above, the oil rig count could keep rising until at least November 2018.

US crude oil production

In the week ended August 31, 2018, US crude oil production plateaued at 11 MMbpd (million barrels per day), its record level. Between June 1, 2018, and August 31, 2018, US crude oil production was 10.8 MMbpd–11 MMbpd. However, last week, the oil rig count decline and was nine less than its 3.5-year high, which might cap US crude oil production, a concern for oil bears.

Oilfield service stocks

Since February 11, 2016, the VanEck Vectors Oil Services ETF (OIH) has risen 6.1%. Schlumberger (SLB), Halliburton (HAL), Transocean (RIG), and Baker Hughes (BHGE) have returned -12.9%, 27.4%, 26.4%, and 15.2%, respectively. These four stocks account for ~44% of OIH’s holdings. The oilfield service subindustry could benefit from rising US drilling activity. However, any fall in oil rigs might concern these oilfield services stocks.

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