Must-know update: Why the US oil rigs are up over 10% year-to-date

Oil rig counts on the rise

Last week, the Baker Hughes oil rig count dropped from 1,534 to 1,527, down by 7. Despite last week’s drop, oil rig counts have risen by ~11% (+149) since the beginning of 2014, with a large part of the increase in the Permian Basin in West Texas (+78). Out of the current 1,527 oil rigs at work, the majority are either in the Permian (537), the Eagle Ford (209), the Williston/Bakken (183), or the Mississippian (70). Oil rig counts can indicate how producers such as ExxonMobil (XOM), Pioneer Natural Resources (PXD), Oasis Petroleum (OAS), and EOG Resources (EOG) feel about the drilling and price environment. These companies also comprise ETFs such as the Energy Select SPDR ETF (XLE). Although oil prices have declined somewhat since reaching ~$110 per barrel in early September (using WTI crude oil prices), they’ve stayed above the $90-per-barrel level for most of 2013, and into 2014, which generally supports oil drilling, and consequently a high oil rig count. For more on crude oil prices, read Why energy commodities like oil and gas finished flat on the week.

Background: The U.S. rig counts increased rapidly following the recession, but have since flatlined

When the worst of the recession hit, U.S. oil rig counts fell from over 400 to nearly 175. Since bottoming around mid-2009, two major trends caused oil rig counts to rebound rapidly. First, when oil prices sank to below $40 per barrel in early 2009, no one was looking to drill for oil—because it was unprofitable, and frozen capital markets made raising money to fund capex programs expensive. In 3Q09, oil prices recovered to roughly $70 per barrel. Raising money in the capital markets was starting to become easier. Second, during that period, companies were beginning to drill basins that became attractive with the help of new technology, notably shale basins. From mid-2009 to now, more and more oil rigs began working in places like the Bakken Shale in North Dakota, the Eagle Ford Shale in South Texas, and the Permian Basin in West Texas, where previous drilling activity had either stagnated or been minimal.

Oil rig counts dipped somewhat in mid-2012, a period characterized by some volatility in oil markets, with WTI crude oil prices dropping from over $100 per barrel and recovering to $99.46 per barrel. Oil prices have since recovered, and so have oil rig counts. Oil prices remained relatively buoyant over 2013, and most analysts expect price levels to remain economic enough to drill in the major U.S. oil shale plays (the Bakken, Eagle Ford, and Permian). As upstream companies have disclosed capital expenditure plans for 2014, it seems that oil drilling activity in the U.S. will remain very active. If oil prices remain relatively high and stable, oil rig counts are likely to remain near current levels or continue to increase. To learn more about important releases that affect energy stocks and ETFs, check out Market Realist’s Energy & Power page.