Will the US Crude Oil Rig Count Drop Affect Crude Oil Prices?
Open Interest Contracts Fall: Will Crude Oil Prices Bottom Out?
US crude oil rig count
On February 26, 2016, Baker Hughes (BHI) published its weekly crude oil rig count report. The report showed that the US crude oil rig count fell by 13 rigs to 400 rigs for the week ending February 26. Similarly, the US crude oil rig count had fallen by 26 rigs to 413 rigs for the week ending February 19. The US crude oil rig count has fallen by 138 rigs in the last ten weeks. It has fallen by 138 rigs so far in 2016.
US crude oil rig count: peak and bottom
The US crude oil rig count peaked at 1,609 rigs in October 2014 due to technological advancements, cheaper credit facilities, and higher crude oil prices between 2010 and 2014. In contrast, it bottomed out at 400 rigs on February 26, 2016. The rig count has fallen due to the 70% fall in crude oil prices since June 2014. The fall in oil prices and drilling activity suggests oil producers are still pessimistic about crude oil prices. Lower crude oil prices have led to the 10% decline in production from oil producers like Apache (APA), Devon Energy (DVN), and Continental Resources (CLR). This affects oil drillers like Schlumberger (SLB), Superior Energy Services (SPN), and Halliburton (HAL). For more on US energy companies’ financial woes, read US Oil and Gas Companies’ Debt Exceeds $200 Billion.
Impact
The EIA (U.S. Energy Information Administration) estimates that US crude oil production could fall by 116,000 bpd (barrels per day) in February 2016. Slowing US production would give a boost to oil prices, which would benefit oil producers like Laredo Petroleum (LPI), Whiting Petroleum (WLL), Ultra Petroleum (UPL), and Stone Energy (SGY). In contrast, if US crude oil production doesn’t slow down, we could see crude oil trade at low levels for the next two decades. For more on US crude oil production, read US Shale Oil Productivity Impacts the US and Global Oil Market.
ETFs
ETFs and ETNs like the ProShares UltraShort Bloomberg Crude Oil ETF (SCO), the First Trust Energy AlphaDEX Fund (FXN), the Vanguard Energy ETF (VDE), and the VelocityShares 3x Long Crude Oil ETN (UWTI) are also impacted by the rise and fall of oil prices.
In the next part of this series, we’ll discuss how hedge funds are playing the crude oil market.
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