Rising oil rig counts could signal that producers are feeling confident

2013.03.04 - US Oil Rig CountEnlarge Graph

  • US oil rig counts rose last week from 1,329 to 1,333 and have crept up from 1,318 since the beginning of the year possibly signaling that oil producers are feeling positive about the current price environment and are willing to put more capital to work to produce oil.
  • The number of domestic oil rigs drilling rose dramatically from as low as 179 in June 2009 to 1,432 in August 2012. Since then rigs fell off somewhat, possibly in response to weaker oil prices.
  • Over the past few months, the amount of oil rigs drilling looks to be stable or growing slightly as oil prices have rebounded from last year’s lows and have remained relatively robust thus far.

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 increased by 4 (0.3%) from 1,329 rigs working to 1,333 rigs working. An increase in oil rigs drilling could be a signal that oil producers are feeling positive about the current oil price environment as they are putting more 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.

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.

2013.03.04 - WTI Oil PricesEnlarge Graph

However since the dip last year, oil prices have remained relatively robust. Oil had a strong rally beginning in December of last year. West Texas Intermediate (WTI), the benchmark US crude, was trading around $85.00/barrel as recently as the second week of December and reached $97.00/barrel in mid-February. Crude is currently trading at ~$90.00/barrel.

Given that prices have remained relatively high, it makes sense that producers are more constructive on the operating environment and would put more rigs to work. Since January 4, the rig count has actually increased by 15.

The rise in rig counts last week could be a signal that oil companies are feeling positive about the current price and operating environment if the trend continues and was a positive short-term data point. Additionally, more US oil drilling is generally positive for companies across the energy spectrum with US assets 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).