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US Oil Production Growth Might Slow Faster than Expected

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Nov. 20 2020, Updated 3:33 p.m. ET

Oil rig count

Last week, the oil rig count fell by 21 to 852. The 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 January 23, 2019, US crude oil active futures rose 99.7%. The oil rig count reached a 6.5-year low of 316 in May 2016. Between May 27, 2016, and January 18, 2019, the oil rig count rose ~169.6%. Between May 27, 2016, and January 11, 2018, US crude oil production rose ~36.2%.

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Slowdown coming?

On October 3, US crude oil active futures settled at $76.41 per barrel—the highest closing level since November 21, 2014. Based on the pattern we saw above, the oil rig count could keep rising until at least March. By the second quarter, US crude oil production growth might slow down. In the week ending November 16, the oil rig count was at 888—the highest level since March 2015. The price difference between WTI at Cushing versus Midland has contracted to the lowest level since March. The fall in the spread might indicate a slowdown in the Permian Basin’s oil production since the takeaway capacity is constant.

US crude oil output

In the week ending on January 11, US crude oil production was 11.9 MMbpd (million barrels per day), which is a record level. On June 1–October 26, US crude oil production was between 10.8 MMbpd and 11.2 MMbpd. The production broke that range with a rise in the oil rig count in the past few months. With a retreat in the oil rig count, the growth in US oil production might slow down.

Oilfield services stocks

Since US crude oil’s 12-year low on February 11, 2016, the VanEck Vectors Oil Services ETF (OIH) has fallen 23.9%. Schlumberger (SLB), Halliburton (HAL), Transocean (RIG), and Baker Hughes, a GE company (BHGE), have returned -36.1%, 8.5%, -4.4%, and -14.2%, respectively. Together, they account for ~44% of OIH’s holdings. Any slowdown in US oil drilling activities could drag these stocks.

Any slowdown in US oil production might also impact broader market indexes like the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA).

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