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, tracking 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 provides products and services for drilling, formation evaluation, completion, production, and reservoir consulting. As a result, its indicators reflect the forefront of the location of future oil production, which can affect demand for product tankers.
Oil rig count weak since second half of 2013
On October 12, the number of active rotatory rigs in the United States stood at 1,367, dropping from 1,372 rigs on October 4, but it remains above the 1,362 seen at the end of September. Even though oil prices, which reflect the demand and supply of oil, remained above $100 per barrel throughout the third quarter of 2013, the rig count has fallen ~4% since it peaked in mid-June at 1,413.
Lower rig count due to efficiency
While investors may take the falling rig count as negative at first glance, the decline was driven by more efficient drilling, according to a statement from Halliburton. The company noted, “In spite of a relatively flat sequential U.S. rig count, drilling efficiencies in the trend towards multi-well pads are driving a more robust well count.” (See Must-know: Oil prices are up but oil rigs are down since mid-year.)
According to Baker Hughes, well count is an extension of the rotary rig count and tracks the number of oil or gas wells that are consumers of oil service and suppliers. So a more robust well count in the United States would mean greater output in the months ahead. Unfortunately, the well count is only published quarterly, which makes it better-suited for drawing long-term trends rather than short-term developments.
Impact on product tanker demand
The EIA (Energy Information Administration) currently estimates North American production to account for the majority of crude oil production increases in 2013 and 2014—in total about 1.2 million barrels a day of increased production. Because US law prohibits the export of domestically produced crude oil except for special circumstances, in order to preserve domestic oil and discourage oil imports by keeping domestic supply within the country, oil companies have to refine this oil in the United States and export it via product tankers if it’s not consumed domestically.
Higher demand for product tankers bodes positively for tanker stocks such as Capital Product Partners LP (CPLP), Tsakos Energy Navigation Ltd. (TNP), Scorpio Tankers Ltd. (STNG), and Navios Maritime Acquisition Corp. (NNA) in the medium to long term. The Guggenheim Shipping ETF (SEA), which invests in CPLP aond TNP, as well as other large shipping companies like Maersk, will also benefit from an increase in demand for product tankers.
© 2013 Market Realist, Inc.
But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.