How US Production Is Affecting WTI Crude Oil Prices

In February 2016, WTI crude oil prices fell to their lowest closing level in 12 years. Between February 11, 2016, and July 15, 2019, WTI crude oil prices rose 127.3%. The United States Oil Fund LP (USO) gained 53.9% in the period.

USO tracks US crude oil futures. The oil rig count reached a six-and-a-half-year low of 316 in May 2016. Between May 27, 2016, and July 12, 2019, the oil rig count rose about 148.1%. Between May 27, 2016, and July 5, 2019, US crude oil production rose about 40.8%.

Last week, the oil rig count fell by four to 784—its lowest level since February 2. The rig count tends to follow US crude oil prices with a three- to six-month lag.

On December 24, WTI crude oil prices 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 bottom out this month. In the week that ended on July 12, the oil rig count was at its lowest level since February 2, 2018. In the current quarter, US crude oil production might increase—a factor that may be of concern when it comes to any upside in oil prices. Moreover, with OPEC+ extending its production cut deal until March 2020, US oil exporters could aim to increase their market share.

In the week that ended on July 5, US crude oil’s weekly production was at 12.3 million barrels per day, near its record high. In its Drilling Productivity Report on July 15, the EIA (U.S. Energy Information Administration) estimated that seven major US shale regions would add 49,000 barrels per day in August compared to July. Based on the EIA’s Monthly Crude Oil Production Report on June 28, US oil production gained 246,000 barrels per day in April on a month-over-month basis. Any rise in the oil rig count could bring a considerable upside to US crude oil production.

Since the US oil rig count hit a multiyear high of 888 on November 16, the VanEck Vectors Oil Services ETF (OIH) has fallen 24.2%. Schlumberger (SLB), Halliburton (HAL), and Transocean (RIG) have fallen 16.1%, 27.7%, and 34.9%, respectively. OIH has 44% exposure to these oil services stocks. Any rise in US oil-drilling activities could give them a boost. Between November 16, 2018, and July 12, 2019, the oil rig count fell ~11.7%. If the oil rig count rises, it could benefit these stocks. The broader market will likely be affected by an increase in US crude oil production.