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Oil Rig Count Might Have Bottomed Out

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Oil rig count

Last week, the oil rig count rose by four to 793—the highest rise in oil rigs since April 5. 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 July 1, 2019, US crude oil active futures rose 125.4%. The oil rig count reached a 6.5-year low of 316 in May 2016. Between May 27, 2016, and June 28, 2019, the oil rig count rose ~150.9%. Between May 27, 2016, and June 21, 2019, US crude oil production rose ~38.5%.

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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 current quarter, the US crude oil production might increase—an important factor that might concern any upside in oil prices.

For the week ending June 21, US crude oil’s weekly production was at 12.1 million barrels per day—near its record high. In the Drilling Productivity Report released on June 17, the EIA (U.S. Energy Information Administration) estimated that seven major US shale regions will add 70 thousand barrels per day in July compared to June. Based on the EIA’s Monthly Crude Oil Production report released on June 28, US oil production gained 246 thousand barrels per day in April on a month-over-month basis. Another rise in the oil rig count might bring large upside in US crude oil production.

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 22.7%. Schlumberger (SLB), Halliburton (HAL), and Transocean (RIG) have fallen 18.5%, 29.3%, and 33.7%, 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 ~10.7%. Since the oil rig count reached more than a one-year bottom last month, OIH has risen 13.3%. If the oil rig count rises more, it might benefit these oilfield services stocks. The broader market will likely be impacted by an increase in US crude oil production.

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