Oil & Gas - Energy - Commodities - Resources (OILBRENT)

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Analyzing Key Dynamics of the Oil Market
By: Market Realist | March 26, 2019

US crude oil

On March 25, US crude oil prices fell 0.4% and settled at $58.82 per barrel. Concerns about global economic growth might have dragged oil prices. On March 18–25, US crude oil futures fell 0.9%



Will oil prices rise to $70 in 2020?

Trafigura, a commodity trading firm, expects Brent crude oil to trade above $70 per barrel in 2020. OPEC’s supply cuts and US sanctions on Venezuela this year will be the key factors for oil’s rise. The firm is concerned about weaker macro factors that might not help oil extend its gains to a larger extent despite tighter supply in the second half of the year. However, if the US economy falls into a recessionary phase, the current supply cuts might not help Brent crude oil sustain even at $60. On March 25, Brent crude oil active futures closed at $67.21 per barrel.

The risk is from weaker macro factors and US oil exports. In recent U.S. Energy Information Administration data, we saw an increase in US crude oil exports. In the week ending March 15, US oil exports have risen by approximately one million barrels per day from November 2018, which is ~83% of OPEC and non-OPEC members’ pledged output cut.

The S&P 500 Index (SPY), the Dow Jones Industrial Average (DIA), and the S&P Mid-Cap 400 (IVOO) might be impacted by any short-term changes in oil prices due to their exposure to the energy sector. Upstream energy stocks like ConocoPhillips (COP), Chesapeake Energy (CHK), and Occidental Petroleum (OXY) will likely be impacted by any changes in oil prices.

Oil Rigs Impact US Oil Production

Oil rig count

Last week, the oil rig count fell by nine to 824—the lowest level since April 27. 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 March 25, 2019, US crude oil active futures rose 124.4%. The oil rig count reached a 6.5-year low of 316 in May 2016. Between May 27, 2016, and March 22, 2019, the oil rig count rose ~160.7%. Between May 27, 2016, and March 15, 2018, US crude oil production rose ~38.5%.
US crude oil production
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, the US crude oil production growth rate might reverse. In the week ending November 16, the oil rig count was at 888—the highest level since March 2015. In the week ending on March 15, the US crude oil production was 12.1 MMbpd (million barrels per day)—back to its record level. With the fall in the oil rig count, US crude oil production might fall going forward.
US crude oil output and 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 12.4%. Schlumberger (SLB), Halliburton (HAL), Transocean (RIG), and Baker Hughes, a GE company (BHGE), have returned -11.9%, -13%, -9.2%, and 17.4%, respectively. OIH has 44% exposure to these stocks. Any slowdown in US oil drilling activities could be a concern for these stocks. Any slowdown in US oil production might also impact broader market indexes like the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA).

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