Why U.S. oil rig counts dipped despite higher prices

U.S. oil rig count trends depend on how much companies are willing and able to spend on drilling

Rig counts represent how many rigs are actively drilling for hydrocarbons. Baker Hughes, an oilfield services company, reports rig counts weekly. 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.

2013.08.02 - Oil Rig CountsEnlarge Graph

Oil rig counts dipped last week

The above chart shows U.S. oil rig counts from January 2005. Last week, the Baker Hughes oil rig count dipped from 1,401 to 1,388. 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, this data point is contrary to what oil prices would indicate, as WTI crude prices have remained elevated in the $105-to-$110-per-barrel range over the past few weeks. The decrease could be a statistical blip, but if oil rig counts continue to decrease, they could signal that producers are feeling more cautious. Oil rig counts have largely been rising throughout 2013 and remain up 5% 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. However, 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 and rising oil prices have likely supported oil rig counts

But 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, traded around $85 per barrel as recently as the second week of December and reached $97 per barrel in mid-February. Recently, WTI has had a strong rally for several reasons.

  1. Unrest in the Middle East has caused traders to fear supply shocks (please see Why Middle East and North Africa turmoil could cause an oil price spike)
  2. Large inventory draws have helped to alleviate the glut of crude that had built up at the oil hub at Cushing (please see Must-know: Oil prices rise to new highs on supportive inventory report)
  3. Strong economic data out of the United States has indicated stronger oil demand (please see Positive U.S. manufacturing sector data boosts oil prices)

2013.08.02 - WTI STEnlarge Graph

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 August 2, the rig count increased by 70, or 5%.

Are oil companies more negative about the current prices and operating environment?

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. However, note that this is only one data point and could be a statistical anomaly. The trend throughout 2013 has been largely positive. Note that more U.S. oil drilling is generally positive for companies across the energy spectrum with U.S. assets from producers (such as XOM, COP, HES, and CVX, as we’ve seen) to midstream companies to service companies—many of which are in the Energy Select Sector SPDR ETF (XLE).