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The dynamics of global oil trade and demand for crude tankers

Part 3
The dynamics of global oil trade and demand for crude tankers (Part 3 of 9)

Oil firms focus on production development in the United States

U.S. rotatory rig count: The forefront of future oil production

The U.S. Crude Oil Rotary Rig Count is a valuable indicator that shows how much drilling activity is occurring in the United States. It tracks the number of rotating drills that are drilling into the Earth’s crust in search of oil or developing oil wells. The indicator is published by Baker Hughes—one of the largest oilfield service companies in the world that provide products and services for drilling, formation evaluation, completion, production, and reservoir consulting. It works to realize future oil production. As a result, its indicators reflect the forefront of future oil production.

US Crude Oil Rotary Rig Count 2013-09-06Enlarge Graph

Growing focus on the United States for oil drilling

Since 2007, rotary rig counts in the United States have steadily risen. They grew from 250 to 400 before the 2008 financial crisis. The increase wasn’t just because the global economy was doing well and oil demand was rising, so that oil companies increased drilling activity. The second indicator, which illustrates the U.S. rig count as a share of the world rig count, shows that oil companies were gradually shifting their attention to the land of so-called opportunity and freedom. While U.S. rig counts only took up 7.0% of the world’s total active rigs, they gradually grew to 13.0%, which means drilling activity was growing faster in the United States than other parts of the world.

Energy boom driven by two technologies

The increase in drilling activity in the United States was driven by experiments of hydraulic fracturing and horizontal drilling. The first technology uses high water pressure to break through hard rocks and obstacles, enabling oil companies to find oil in locations once inaccessible and uneconomical. As the name may suggest, horizontal drilling refers to creating oil pipes that are slanted or horizontal (parallel) to the ground. Because oil reservoirs are often short but wide, this makes extraction less costly for oil companies. Instead of building several vertical wells, oil companies can extract more oil using one pipe.

Even though the number of rig counts halved throughout the financial crisis, oil companies focused more on cutting back drilling activity in other parts of the world, as the United States’ share of world rig counts only dropped from 12.5% to 10.0%. With favorable policies allowing oil companies to pull oil out of U.S. ground and trials proving successful, rig counts have exploded upwards from just 200 at the start of 2009 to near 1,400 recently.

U.S. oil rig count still growing

While rig counts have stagnated, with the rig count at 1,388 as of August 30, 2013, the Unites States’ share has continued to rise. As of July 30, the share of U.S. rig count in the world stood at 41.7%—slightly lower than the previous months but nonetheless confirming a continuous uptrend. This suggests the majority of additional oil production will come from the United States in the future, which would continue to negatively affect demand for crude tankers (very large crude carriers, or VLCCs, in particular) that haul oil from the Middle East to the United States. Some examples of companies that will be negatively affected include Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Teekay Corp. (TK), which owns 25% of Teekay Tankers, and Nordic American Tankers Ltd. (NAT). The Guggenheim Shipping ETF (SEA), which invests in some crude tanker stocks, will also be negatively affected.

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