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Weekly key indicators for tanker stocks (Part 6: U.S. oil rigs)

Continued from Part 5

Rotary rigs: A leading indicator of future production

One indicator that’s useful to investors to get a sense of the United States’ future oil production is the number of crude oil rotary rig counts, published weekly by Baker Hughes. Rotary rigs use rotating drills to dig into the Earth’s crust to find oil and create wells used to extract oil from the ground. The rig count is a leading indicator of future oil production. In 2007, the number of rotary rigs for oil used in the United States stood below 300. Today, there are close to 1,400 rigs operating on U.S. soil. The large increase in rotary rigs, which more than quadrupled, has preceded oil production in the past.

US Crude Oil Rotary Rig Count & Domestic Production 2013-08-06Enlarge Graph

The United States: Where oil production soars

On August 2, we saw oil rig counts fall from to 1,388, from 1,401 the week before. While this might seem negative, oil rig counts remain high in the United States. This suggests oil companies such as BP, Shell, Chevron, and Petrobas continue to search for oil in the United States for incremental oil supply, and it reaffirms the fact that the U.S. energy boom is here to stay. It’s important to know that the level of active rigs is used to replace existing wells as well as to add new wells. Because most oil wells were adding incremental capacity in the United States for the last few years, the level of active rigs was more applicable to the rate of crude oil production growth—not crude production itself. As we saw in Part 4, oil production continues to grow at a pretty rapid place during the first half of this year. In the future, however, that may change.

US Crude Oil Rotary Rig Count 2013-08-06Enlarge Graph

Oil companies spending more money in the United States

Plus, the United States’ share of the world’s rig count rose to a new record high of 44.37% in May. Although June’s figure came in slightly lower, at 42.42%, it remains above the ratio seen in 2012. This means oil companies are spending more time and capital expenditure in the United States than they are in other parts of the world. So we can expect larger increases in U.S. oil production relative to production in other countries, which will negatively impact oil shipments overall.

US Crude Oil Rotary Rig Count 2013-08-01Enlarge Graph
This bodes negative for tanker stocks such as Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), Nordic American Tanker Ltd. (NAT), and Frontline Ltd. (FRO), as well as the Guggenheim Shipping ETF (SEA).

Learn more about indicators that reflect tanker fundamentals

Continue to Tanker rates and oil prices (Part 7) or go back to see The list of indicators (Part 1).