The rig count gain this week was the third increase in a row, reports Baker Hughes, the longest winning streak since September 2014, bringing the total rig count up to 670, the highest since early May. Crude oil futures plumbed multi-month lows Friday and racked up a sixth straight week of losses. Also weighing on prices was the latest rig count from oilfield services firm Baker Hughes, which showed U.S. energy firms added 6 oil rigs this week, continuing a recent trend of increases, even after U.S. crude oil prices plunged 25 percent from a recent high in June.

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How does active oil rig count in the US affect heating oil prices

Field oil extraction facilities are commonly called ‘oil rigs’. An oil rig alone has a minimal stake in overall oil extraction in the US, so their number is often measured in hundreds to better represent current oil extraction trends. Active oil rig count is used among commodity brokers and oil traders as an input for determining wholesale oil prices. Although oil prices are determined by various events across the globe, the US remains among the top in both oil extraction and consumption, so the rig count always play an important role.

Oil extracting companies sell the oil futures, meaning they offer oil which will be set for delivery after a certain period of time, such as a quarter or two. This allows them to prepare all technical aspects of oil extraction and start rigging timely. Whether a domestic oil trading company needs domestic or imported oil depends on various factors: type of crude, availability, current price with shipping and else. Heating oil consumed in the US is almost entirely made of domestic crude since overall its chemical properties, time to deliver and price including shipments make it more suitable for home heating purposes, which is highly seasonal.

Dramatic fall in number of active oil rig during spring and summer of 2015 shows us that the price of crude is so low that importing it is cheaper. Technology also plays a role as modern oil rigs have a much greater productivity. The rig count doesn’t really represent a good indicator for determining future oil price trends, as that number is rather a consequence than a cause. For determining prices of heating oil on a local level, it is more important to watch and monitor current inventories and inventory trends.

However, it may still play a role in oil heat price determination to some extent. If the rig count starts to rise while oil price falls or remains unchanged, it would mean that over next few months heating oil prices will keep falling at a faster pace than crude oil. This is because a substantial portion of domestic crude is refined for heating purposes.

Generally speaking, when the rig count increases, the price of oil decreases, and vice versa. If rig count falls, it is a clear indicator of full inventories, though it is not always the case that full inventories shut down a large number of rigs – it may also be triggered by other events and phenomena.

Likelihood that rig count may indicate full inventories and thus predict heating oil price drop increases during winter, as inventories are spent up faster. Rig count jumps during season are particularly good as that oil will be around on market quickly and regardless the purpose oil traders will need to clear inventories faster, and they can only achieve that by substantial lowering the oil heat price.