Oil Traders: Ready for Higher US Oil Output in Q3

Oil rig count

Last week, the oil rig count rose by one to 789—near the lowest level since February 2, 2018. The rig count tends to follow US crude oil prices with a three to six-month lag.

Oil Traders: Ready for Higher US Oil Output in Q3

In February 2016, US crude oil prices fell to the lowest closing level in 12 years. Between February 11, 2016, and June 24, 2019, US crude oil active futures rose 120.9%. The oil rig count reached a 6.5-year low of 316 in May 2016. Between May 27, 2016, and June 21, 2019, the oil rig count rose ~149.7%. Between May 27, 2016, and June 14, 2019, US crude oil production rose ~39.7%.

Has the oil rig count bottomed out?

On December 24, US crude oil active futures settled at $42.53 per barrel—the lowest closing level since August 10, 2016. Based on the pattern we saw above, the oil rig count could keep falling until at least June. In the week ending June 14, the oil rig count was at the lowest level since February 2, 2018. In the next quarter, the US crude oil production might increase—an important factor that might kill any upside in oil prices. For the week ending June 14, US crude oil’s weekly production was at 12.2 MMbpd (million barrels per day)—near its record high. In the Drilling Productivity Report released on June 17, the EIA estimated that seven major US shale regions will add 70 thousand barrels per day in July compared to June.

Oilfield services stocks

Since the US oil rig count hit a multiyear high of 888 on November 16, the VanEck Vectors Oil Services ETF (OIH) has fallen 26.3%. Schlumberger (SLB), Halliburton (HAL), and Transocean (RIG) have fallen 19.8%, 30.7%, and 36.6%, respectively. OIH has 44% exposure to these stocks. Any rise in US oil drilling activities could boost these oil services stocks. Between November 16, 2018, and June 14, 2019, the oil rig count fell ~11.1%. If the oil rig count bottoms out, it might benefit these oilfield services stocks.