Recommendation: Watch oil rig counts to monitor industry sentiment
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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.” So 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.
Oil rig counts fell slightly last week
The above chart shows U.S. oil rig counts from January 2005. Last week, the Baker Hughes oil rig count fell from 1,395 to 1,391—a slight decrease. The decrease in oil rigs drilling could signal that oil producers are feeling negative about the current oil price environment, as they’re putting less capital to work to produce oil. However, last week’s figure was only one data point from which it’s difficult to extrapolate a conclusion, and you would have to further monitor rig counts before determining that they’re really trending downward. Oil rig counts have largely been rising throughout 2013 and remain up 6% throughout 2013.
Rig counts fell during the financial crisis, but have since recovered
During the 2008 crisis, oil rig counts fell significantly, as oil prices tanked and companies had more difficulty accessing financing to fund drilling. But since then, the U.S. 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 fell 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.
Recent stable oil prices have likely supported oil rig counts
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 U.S. crude, was trading around $85 per barrel as recently as the second week of December, and it reached $97 per barrel in mid February.
Excluding brief periods of weakness, WTI has largely been range-bound between ~$90 per barrel and ~$97 per barrel. Recently, WTI broke through that range, as political unrest in Egypt and large inventory draws have pushed prices upward. Please see Why Middle East and North Africa turmoil could cause an oil price spike and Must-know: Oil prices rise to new highs on supportive inventory report for more on these developments.
Oil companies might feel more negative about the current price and operating environment
Given that prices have remained relatively high and stable, it makes sense that producers were more constructive on the operating environment and put more rigs to work. From January 4 to July 12, the rig count increased by 73, or 6%.
This past week’s slight decrease in rig counts, if continued, could signal that oil companies are feeling more negative about the current price and operating environment. Additionally, less U.S. oil drilling is generally negative for companies across the energy spectrum with U.S. assets from producers (such as XOM, COP, HES, and CVX, as mentioned above) to midstream companies and to service companies—many of which are found in the Energy Select Sector SPDR ETF (XLE).