Oil Price Commentary: Oil Price Under Pressure from Rising US Crude Oil Production and Rig Count

Last Week Oil Market Data:

Last Week Crude Oil Price Movement: Supported by a decline in US crude oil production and rig count and a slowdown in US crude oil and gasoline stockpiles’ build-up in the week before, oil prices were trading in the green last week with a slight upward movement during the first two days of trading. However, on Wednesday, oil prices reversed a course and lost the gains made during the week before. Despite the sharp decline in US crude oil and gasoline stockpiles reported on Wednesday, the fall in oil prices was driven by the data that showed an increase in US crude oil production which offset the positive impact of falling stockpiles. The fall was further intensified on Friday as Baker Hughes reported an increase in US rig count by 12 rigs. The increase in US crude oil production and rig count resulted in oil prices falling by more than 4 percent from Wednesday to Friday. Brent crude and WTI closed the week around $46.88/bbl and $44.47/bbl respectively. 

Last Week’s Brent Crude Oil Price Movement

U.S. Crude Oil Inventories: Last week’s US crude inventories data published by the Energy Information Administration, EIA showed that U.S. crude oil inventories fell sharply by 6.3 million bbl to the week ending June 30, 2017. The unexpected decline in US crude oil stockpiles was expected to provide some support to oil prices to drive the price higher following the support oil prices received during the week before. However, this support was offset by negative pressure from rising US crude oil production and rig count. At its current level, US crude oil inventories stand at 502.9 million barrels.

US Crude Oil Stockpiles

U.S. Gasoline Stocks: U.S. gasoline inventories fell as reported in last week’s EIA report by 3.7 million barrels to the week ending June 30, 2017. The positive impact of falling US gasoline stocks on oil prices last week was also offset by the increase in US crude oil production and rig count.  

US Gasoline Stocks

Weekly US Crude Oil Production: As reported by the EIA, US crude oil production increased by 88,000 barrels per day to the week ending June 30, 2017. The increase in US crude oil production came as a surprise to the market especially after a week of support to oil prices driven by a decline of oil production by 100,000 bbl/day. 

 

The sharp increase in oil production put a huge pressure on oil prices last week and resulted in oil prices falling by more than 4 percent. At its current level, U.S. crude oil production stands at 9,338,000 bbl/day, up by 910,000 bbl/day from the same time a year ago. 

US Crude Oil Production

U.S. Rig Count: Last week, U.S rig count resumed its upward trend rising by 12 rigs to 952. Oil rig count was up by 7 rigs to 763, while gas rig count was down by 5 rigs to 189. U.S. rig count is currently 512 up from the same time a year ago. The resistance of US rig count to the recent drop in oil prices and its continuous upward movement tells us that, for US rig count to slow down, oil prices must be maintained around $40/bbl for some time. At a price level above $45/bbl, we expect to see a contentious modest increase in rig count in the following weeks. 

US Rig Count Data, Source: Baker Hughes

Last Week’s Takeaways:

• The oil market’s focus is currently more on US crude oil production and rig count, and unfortunately both these two factors are highly unlikely to drive oil prices up. The sharp decline in US crude oil production and the slowdown in US rig count to the week ending June 30 -which many thought it was the start of a correction that will drive oil prices up- didn’t last for one week, and despite the fall in US crude oil and gasoline inventories, the market chose to ignore such positive momentum and rather focus on the growth in US output and drilling activities. We expect this trend to continue until the end of the third quarter of 2017, and it will continue to put pressure on oil prices preventing the price from going above $50/bbl.
• Oil price will highly unlikely go above $50/bbl in the next few weeks. The reason is simple; for the prices to go up, the market must see a decline in US crude oil production and a slowdown in US rig count growth for a couple of consecutive weeks, a trend that we don’t expect it to take place anytime soon especially as prices remain below $50/bbl which encourages producers to ramp up their production to compensate for decline in revenue.
• A one-off decline in US production and rig count like what happened during the last two weeks is not enough to push prices up and sustain it at the same levels. There must be a deep and continuous decline in US crude oil production and rig count to support the rally and sustain the gains. Unfortunately, that is highly unlikely to happen in the short term.
• Last week’s shift in oil prices direction gives us an overview of how oil prices movement will be the next few weeks. Given the continuous growth in US crude oil production, and the return of oil production from countries like Libya and Nigeria, we expect oil prices to continue trading under pressure between $40/bbl and $50/bbl in the coming two months.

This Week Oil Price Forecast:

Looking at last week’s oil market data and news and expectations of this week’s oil market data, we see oil prices facing a bad week ahead. Yes, there is a support to oil prices from the decline in US crude oil and gasoline stockpiles, however, this support is not enough to offset the negative momentum due to rising US crude oil production and rig count along with continuous return of oil production from Nigeria and Libya.

Weekly Oil Price Forecast, Oil Industry Insight.

This week, oil prices are expected to continue falling aimed the renewed concern over supply glut. Brent crude and WTI are expected to fall by 2 to 3 percent during the first two days of trading. We expect the fall to further intensified on Wednesday through Friday as we see US crude oil production and rig count increasing again this week.

US crude oil and gasoline stockpiles are expected to fall slightly this week providing some support to oil prices, however, similar to last week, this support will could only prevent oil prices from falling sharply. The only support that could help oil prices increase at this moment is comments by OPEC regarding deeper oil output cut this year, and there is a high probability that OPEC members are going to use such comments to prevent prices from sliding below $40/bbl.

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Remark: The expectation of oil prices’ direction in this commentary are based on the oil market data and news up until the time of writing this commentary. As the week starts, new data and news are reported and could influence oil prices differently. Therefore, the direction of oil prices cloud be different from what was expected here. It is important to stay updated with oil market data and events as they occur.