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Oil rig activity stays high, negative for oil shipping

US Crude Oil Rotary Rig Count and Crude Import 2013-06-27Enlarge GraphAn update to U.S. oil production expected to hit record in 2013, negative for tankers

Importance of oil rig count

The U.S. oil rig count is a leading indicator of U.S. oil production and oil imports. Since 2008, a boom in the U.S. oil industry has negatively impacted demand for tankers—vessels that transport oil across ocean. Higher U.S. oil production due to the application of technologies called “hydraulic fracturing” and “horizontal drilling” has made it possible and more efficient to extract oil from U.S. soil, prompting U.S. refiners to purchase less imported oil from OPEC (Organization of the Petroleum Exporting Countries) and more domestic oil, which means less business for tanker firms.

Rig activity stays high

On June 21, 2013, the number of rotatory rigs targeting oil in the United States stood at 1,405. Rotatory rigs use rotating drills to dig into the Earth’s crust to find oil and create wells that are used to extract oil from the ground. While lower than the last report’s 1,412 seen in May 10, a persistently high level of drilling activity reflects oil companies’ continued focus on finding oil in the United States. Although there’s a slight lag between drilling activity and oil production, because some drilling activity is allocated to finding oil and it takes time for companies to set up drilling wells, investors can expect higher U.S. oil production. The IEA (International Energy Agency) estimates that the United States will surpass Saudi Arabia as the largest supplier of oil by 2020. Compared to Saudi Arabia’s current daily supply of 9 million barrels, the United States only produces about 7 million.

As domestic production rises, U.S. oil import should continue its fall over the next few years. Current data from the American Petroleum Institute points toward lower figures, with daily import volume breaching below 8 million barrels per day more often this year. As long as imports continue to fall (a long-term trend for now), shipping rates will likely remain depressed, which negatively affects earnings and share prices of tanker companies such as Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), Ship Finance International Ltd. (SFL), and Scorpio Tankers Inc. (STNG). The Guggenheim Shipping ETF (SEA), which invests in several large shipping companies, will inevitably suffer as well.

See Shipping rates for tankers continue to fall, outlook remains negative or our Shipping Indexes Driver Page for shipping rates. Alternatively, investors may want to take a look at other drivers that currently affect the tanker industry to make better investment decisions at our Marine Shipping Industry Page. For other industries we cover, which will expand over time, visit our Home Page.