Economic Insights: Update on Oil
The price of stocks and the price of oil have become coupled in the past few months as oil appears to be 2016’s bellwether of choice for global economic health. Accordingly, January’s ultra-low oil price levels sent jitters through financial markets as investors worried about oil’s impact on emerging economies dominated by oil exports and, last month’s oil price recovery provided the stock market with welcome relief. With this as a backdrop, OPEC’s failure to agree on production cuts last week was a closely watched event that had the potential to once again roil the markets.
Despite OPEC's failure, however, the stock market has (so far) held up surprisingly well. Perhaps one reason is the collapse of the US rig count as shown in the chart below. Last year we highlighted that the huge increase in US production was the primary cause of the global oil oversupply. The US rig count exploded from 2009 to 2015 resulting in an almost 10-fold increase in US rig count and production peaking at 9.6 million barrels per day in June 2015. In recent months, however, the US rig count has contracted, falling from a peak of 1609 in October 2014 to only 362 as of April 1, 2016. Given the correlation between rig count and production, it seems likely that we will see a significant drop in US oil output, and while we won’t try to predict the price of oil, this is at least one significant factor supportive of prices going forward.