20 Feb

US Oil Production: Oil Bears Should Be Careful

WRITTEN BY Rabindra Samanta

Oil rig count and US crude oil production

Last week, the oil rig count rose by three to 857. The rig count tends to follow US crude oil prices with a three to six-month lag. 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.

US Oil Production: Oil Bears Should Be Careful

WTI spread and US oil production

On February 19, the WTI Cushing-Midland spread was at -60 cents. In late January, the spread entered the negative zone. In August 2018, the spread was as high as $18. A contraction in the spread might indicate a slowdown in oil production in the Permian region. The Permian region is key to the US crude oil production growth rate. The region accounts for 47% of the US crude oil production from major US shale regions. The above graph shows the relationship between the WTI Cushing-Midland spread and US crude oil production.

In the week ending February 8, US crude oil production was 11.9 MMbpd (million barrels per day). The crude oil production was still at its record level. Based on the EIA’s (U.S. Energy Information Administration) Drilling Productivity Report released on February 19, the oil production from major US shale regions might rise to 8.398 MMbpd in March—a new record level.

However, if the production retreats, it might bring a big upside potential for oil prices. Any changes in oil prices could be important for broader market indexes like the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA).

Impact on oilfield services stocks

Since the US oil rig count hit a multiyear high on November 16, the VanEck Vectors Oil Services ETF (OIH) has fallen 8.3%. Schlumberger (SLB), Halliburton (HAL), Transocean (RIG), and Baker Hughes, a GE company (BHGE), have returned -5.6%, -2.3%, -10.3%, and 11.6%, respectively. OIH has 44% exposure to these stocks. Any slowdown in US oil drilling activities could be a concern for these stocks.

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