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Has the trend in oil rig counts reversed?

2013.07.01 - Oil Rig CountsEnlarge Graph

  • US oil rig counts dropped on the week from 1,405 to 1,390. Falling rig counts could signal that oil producers are feeling negative about the current price environment and are willing to put less 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 had fallen off somewhat, possibly in response to weaker oil prices.
  • For much of the beginning of 2013, oil rig counts were on the increase or stable as oil prices had remained in a relatively stable range. However, the past two weeks saw rig counts decrease, possibly signaling a local maximum, and a possible beginning to a reversal in rig counts if the downward trend continues.

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 from 1,405 to 1,390, the second weekly decrease in a row. The recent decrease in oil rigs drilling could be a signal that oil producers are feeling negative about the current oil price environment as they are putting less capital to work to produce oil. However, from these two data points it is difficult to discern any meaningful conclusion and the next few weeks of data will be helpful to determine if this represents a meaningful downward trend.

During the 2008 crisis, oil rig counts had fallen significantly. However, since then, the US oil rig count had 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.

However since the dip last year, oil prices had 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/barrel as recently as the second week of December and reached $97/barrel in mid-February. Excluding brief periods of weakness, WTI has largely been range-bound between ~$90/barrel and ~$97/barrel.

2013.07.01 - WTI Crude STEnlarge Graph

Given that prices have remained relatively high and stable, it makes sense that producers were more constructive on the operating environment and would put more rigs to work. From January 4 to June 14, the rig count increased by 95.  In late June, oil prices experienced some volatility, dropping from ~$98/barrel to ~$93/barrel in just three trading sessions, so the decline in rig counts may have been a reaction to that, however, since then oil prices have recovered and now trade at the ~$98/barrel level.

This past week’s slight drop in rig counts, if continued, could be a signal that oil companies are feeling more negative about the current price and operating environment if the trend continues. Additionally, less US oil drilling is generally negative 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).