When Will Crude Oil Hit a Bottom?

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Published: Mar 10, 2020, 14:36 GMT+00:00

The US rig count will need to fall for prices to rise during a price war

If Saudi Arabia cannot get Russia back to the negotiating table, the swing producer in the global oil market will fall on the United States. US producers hit a record 13.1 million barrels of production in the latest week according to the most recent report from the Department of Energy. This is up 1-million barrels year over year and has drawn some displeasure from Russia. In fact, the collapse of the OPEC+ deal, which led to Saudi Arabia announcing that it was increase production and lower prices, stems from Russia’s displeasure with US production.

The US is the Swing Producer

You can understand why Russia would be irked that they must participate in production cuts, while the US is pumping out crude oil at record rates. The US in the latest shipment even shipped heavy crude oil, which competes directly with Saudi Arabia and Russia. If the price war continues and Saudi Arabia increases production in April, it will come just as the markets are reducing demand due to the coronavirus.

Prices now reflect future increase in supply in conjunction with declining demand. For US producers to generate profits, they need prices to exceed $45-$50 per barrel. With prices in the low 30’s its only a matter of time before companies begin to shut down. Investors should expect announcements that reflect declines in capital expenditures.

Rig Count

When prices tumbled below $30 per barrel in 2016, the total number of rigs were already declining. Total, the number of rigs appears flat and will need to drop substantially before prices can begin to rise. Prices will not likely stay in a new range which is below the profit line for US producers until the market witnesses a downward trajectory in the US rig count.

About the Author

David Beckerauthor

David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.