Oil in Global Economy Series: lower oil price takes toll on U.S. rig applications

The oil price has sunk like a rock since end September, and so has the applications to drill new rig. According to reports, the numbers of applications have come for approval and being approved have declined almost 60 percent as oil price plunged and the future outlook turned bleak

Moreover, the latest report from U.S. Baker Hughes, the numbers of operating rigs have now declined for the second consecutive week and declined to the lowest level since mid-October. Despite all eyes being focused on OPEC and Russia, the United States’ producers and their production are exerting a major influence on the market.

Oil price bottomed January 2016 around $27 per barrel. Operating oil rigs in the United States halted the decline in May 2016 and as the oil price recovered to $80 per barrel (Brent) in September 2018, the operating rigs rose from 315 in the summer of 2016 to 888 as of November 2018. With rising numbers of operating rigs, the production rose from 8.43 million barrel per day in July 2016 to 11.6 million barrels per day as of last week. From 2016 bottom, the production has risen by 3.15 million barrels per day, which is almost double the size of previous OPEC+ production cuts of 1.76 million barrels per day.

It seems that the U.S. oil production going ahead would play a key role in the recovery of oil price. If the production continues to rise, the oil price would find it harder to recover, whereas a decline, coupled with OPEC agreement would help in price recovery.