Rig counts represent how many rigs are actively drilling for hydrocarbons. Baker Hughes, an oilfield services company, reports rig counts 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 dropped by 2 (0.2%) from 1,332 rigs working to 1,330 rigs working. This drop in rigs was very slight, however, a continuation of this trend could signal that oil producers are feeling less confident about the price and operating environment. 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.
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 robust. Prices even had a strong rally since December of 2012. West Texas Intermediate (WTI), the benchmark US crude, was trading around $85.00/barrel as recently as the second week of December and is now trading at ~$96.00/barrel.
Given the rally in oil prices, it makes sense that producers are more constructive on the operating environment and would put more rigs to work. Last week, the rig count actually increased by 17, the largest increase since June 2012. Therefore, this week’s slight drop could be just a blip, however if oil rig counts continue to drop it could signal negative sentiment from producers.
More oil drilling is generally positive for companies across the energy spectrum from producers (such as the XOM, COP, HES, and CVX as mentioned above) to midstream companies to service companies, many of which are found in the Energy Select Sector SPDR ETF (XLE).