Crude oil has staged a number of big swing
s over the last week creating a number of trading opportunities. It all kicked off last Friday after the Baker Hughes weekly US active drill rig count fell to a three year low suggesting that production growth could slow.
Taking a long-term view at drilling activity over the last 30 years shows, however, that so far the falloff in exploration activity has been slight and that the crunch may only be just getting started.
Source: Bloomberg L.P.
For the last three years the US had between 1,500 and 2,000 rigs active and activity fell toward the low end of that range last week. Back in 1986, the last supply war driven oil price crash, US rigs fell from above 2,000 down to 750 and stayed in a 600-1,200 range until 1999, or about 13 years. Even the short exploration recession in 2008-2009 saw rig activity fall from 2,000 to under 1,000 briefly.
Falling drilling activity, however, doesn’t necessarily mean happy days are here again for oil prices. Reduced exploration is the first stage in a three stage process toward reducing supply, and could increase again if producers can get drilling costs down. The second stage is natural production declines, and the third is shutting in producing wells and taking production off stream.
Still, we could potentially see quite a bit of interest in this week’s report after last week’s report took many traders by surprise.
Source: CMC Markets
Over the course of six months, WTI lost over half its value and in recent weeks had become deeply oversold. Oil had started to stabilize in the $44.00 to $50.00 range but the drill rig drop last week ended up being the excuse to kick off a big technical rebound. Oil markets have been active on data announcements this week and could be again today.
WTI has been bumping up against a big downtrend resistance line near $52.65 and a break through $53.00 would confirm the start of an advance that could test the $55.00 round number of $58.65 a common 23% retracement of the previous uptrend, particularly with RSI above 50 indicating momentum turning upward.
Should it falter or the data kick off a round of profit taking ahead of the weekend, $55.00 or even the previous low near $46.90 could be retested.