Crude Oil Market: Risk On or Risk Off?

(Continued from Prior Part)

The EIA (U.S. Energy Information Administration) published that the weekly US crude oil production rose slightly by 76,000 bpd (barrels per day) to 9.2 MMbpd (million barrels per day) for the week ending October 2, 2015. In contrast, crude oil production fell by 40,000 bpd to 9.096 MMbpd for the week ending September 25, 2015. In its October STEO (Short-Term Energy Outlook) report, the EIA highlighted that the US crude oil production fell by 120,000 bpd to 9 MMbpd in September 2015. It’s the lowest level since September 2014.

The US crude oil production peaked at 9.612 MMbpd in April 2015—the highest since the 1970s. The US production rose due to the availability of cheaper credit facilities, technological advancement, and higher crude oil prices between 2010 and 2014. These parameters led the viability of huge shale oil projects in the US. As a result, US production hit record levels. This led to oversupplied crude oil markets. The fight for market share started from the top oil producers. The oil market saw a massive fall in oil prices.

Crude oil prices fell almost 50% in the last year. So, US production fell for the seventh time in the last ten weeks. However, crude oil prices have risen almost 11% in the last two weeks. The rising crude oil prices, depreciating US dollar, and lower drilling cost could support crude oil production. The higher crude oil stays above $60 per barrel. We could see US producers like ExxonMobil (XOM), Hess (HES), Marathon Oil (MRO), and Apache (APA) scale up their production.

Rising crude oil prices also impact ETFs like the iShares U.S. Oil & Gas Exploration & Production (IEO). In contrast, they negatively impact ETFs like  the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).

Currently, US production is more than 3% above the 8.8 MMbpd in 2014. The EIA estimates that the US crude oil output averaged around 8.7 MMbpd in 2014. It could rise to 9.2 MMbpd in 2015. Finally, it’s estimated to slow down to 8.8 MMbpd in 2016. Why are the crude oil prices and crude oil rigs diverging? We’ll discuss this next.

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Browse this series on Market Realist:

• Part 1 - Crude Oil Market: Hedge Funds Are Bullish
• Part 3 - US Crude Oil Rigs Hit Fresh Lows despite Rising Crude Oil Prices
• Part 4 - Bottom Fishing: Crude Oil Prices Rise for the Second Day