Are oil producers feeling uneasy about the future?
Baker Hughes, an oilfield services company, reports the number of rigs drilling for oil in the US on a weekly basis. The company notes that rig count trends are “governed by oil company exploration and development spending which is influenced by the current and expected price of oil and natural gas”. Therefore, rig counts can represent how confident oil and gas producers such as ExxonMobil (XOM), ConocoPhillips (COP), Hess Corp. (HES), and Chevron (CVX) feel about the environment, as more rigs working means more spending.
The above chart shows US oil rig counts from January 2005. Last week, the Baker Hughes oil rig count decreased by 8 (0.6%) from 1,337 rigs working to 1,329 rigs working. A decrease in oil rigs drilling could be a signal that oil producers are feeling negative about the current and/or future oil price environment as they are putting less capital to work to produce oil. During the 2008 crisis, oil rig counts had fallen significantly. However, since then, the US oil rig count has exploded as oil prices rebounded quickly and the development of shale plays such as the Bakken in North Dakota opened up attractive opportunities for oil drilling. Since oil rigs drilling bottomed out in May 2009, there have only been 21 weeks where oil rigs drilling fell by 8 or more (out of 199 weeks) as had occurred this past week.
After the massive increase, oil rig counts had fallen off somewhat in 3Q12. Some market participants noted that rising costs in some rapidly developing basins incentivized producers to cut back spending somewhat. Additionally, oil and gas producers may have pulled back spending in reaction to a dip in oil prices in 2Q12 as seen in the below graph.
However since the dip last year, oil prices have remained relatively robust. Prices experienced a strong rally since December of 2012 up to early February when crude hit ~$98.00/barrel. Since then, prices have fallen somewhat and WTI currently trades at ~$93.00/barrel, however, most producers still feel that $90+ per barrel is an economic price resulting in healthy margins.
This week’s decline in oil rigs drilling is just one data point, and it’s difficult to extrapolate meaning from it as it doesn’t represent an extended trend. However, if a decline in rigs were to continue it could mean that oil companies are feeling less sure about the environment for a variety of reasons such as too much expected supply or a weaker economic outlook, both of which have the effect of depressing prices.
A pullback in oil drilling due to a more bearish outlook on the oil environment is a negative indicator for oil companies from producers such as XOM, COP, HES, and CVX to midstream and service companies as well. Many of these companies are components of the Energy Select Sector SPDR ETF (XLE). Market participants may be looking to see if this short term weekly indicator continues to decline, resulting in a longer term negative trend.
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