What’s Driving the Weakness in US Rig Counts?

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Part 10
What’s Driving the Weakness in US Rig Counts? PART 10 OF 10

WTI Crude Oil Made Sudden Charge despite Rise in Oil Rigs

WTI crude oil price

On Friday, August 28, Baker Hughes (BHI) disclosed the US rig count at noon. WTI (West Texas Intermediate) crude oil rose 0.31% to ~$44.91 following the disclosure.

The crude oil price was holding up before the data release. A few minutes after the release of the data, prices continued to show strength, gaining 0.22% more. Last week, one more crude oil rig came online compared to the week ended August 21. WTI crude oil finally closed with a spike at $45.22 per barrel on Friday, compared to the previous day’s close at $42.56 per barrel, or 6.3% higher.

WTI Crude Oil Made Sudden Charge despite Rise in Oil Rigs

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Crude oil prices and rigs

In the graph above, you can see the interdependent relationship between crude oil rigs and crude oil prices. The number of oil-targeted rigs rose about fourfold from 2009 to 2014. The associated rise in US oil production helped push crude oil prices lower last year.

As crude oil prices fell, the number of active rigs also started to fall. The sharp fall in rigs in 1H15 prompted the market to believe that production would fall soon, bringing about some support for crude oil prices. Prices seemed to be recovering from lows in March until about June. However, prices started weakening again in July and continued to stay weak in August as crude oil rigs started to look like they were turning around.

Rigs and energy companies

Upstream companies that produce oil like Continental Resources (CLR) and Laredo Petroleum (LPI) need strong crude oil prices to increase drilling. But if they drill more in a situation of excess supply, they could pressure crude oil prices lower. So it’s a tricky dance of three participants: crude oil prices, supply, and demand.

Oilfield services companies like Superior Energy Services (SPN) and rig equipment makers and technology providers like FMC Technologies (FTI) and Oceaneering International (OII) witnessed lower 2Q15 earnings as a result of the fall in drilling activity. Thus, any indication of an increase in drilling activity would be encouraging for them. FTI makes up 1.14% of the Energy Select Sector SPDR ETF (XLE).

For the latest updates, visit Market Realist’s Upstream Oil and Gas page.


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