Key crude tanker stocks updates, September 20–27

Part 4

Rig count shows negative global trade dynamics for crude tankers

US rotatory rig count: The forefront of future oil production

The US 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

Overview of past rig count trends

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 US 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 US 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.

US oil rig count still growing

Rig counts have stagnated, with the rig count at 1,388 as of August 30, 2013. For the month of August, the share of US rig count in the world fell to 40.6% from 41.7% in July. Although the share of drilling in the United States fell, it nonetheless remains in an uptrend. The current share also stands above the highs of 2012, despite a flat US rig count, which may imply less drilling activity in the Middle East.

As the share of drilling in the United States remains high, investors can expect the majority of additional oil production to be driven primarily by the United States in the future. This would 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 Tanker Ltd. (NAT). The Guggenheim Shipping ETF (SEA), which invests in some crude tanker stocks, will also be negatively affected.

The Realist Discussions