Must-know: The relationship between oil production and oil rigs

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Sep. 11 2014, Updated 9:01 a.m. ET

More rigs mean more production

Increasing rig counts can cause prices to decrease in the long term. This happens because more rigs mean an increasing number of wells producing oil.

Oil production growth is directly related to the number of operating oil-targeted rigs.

Over the past decade, the combination of horizontal drilling and hydraulic fracturing has provided access to large reserves of shale oil and natural gas in the U.S.

Shale is a sedimentary rock. It forms when silt and clay-size mineral particles are compacted. Shale can trap crude oil and natural gas within its pores.

Shale oil production has transformed the oil and gas industry landscape in the U.S. From January 2007 to August 2014, U.S. crude oil production increased 69%. It increased from 5.1 million barrels per day (or bpd) to 8.6 million bpd.

During the same period, the oil-targeted rig count has increased from 309 to 1,575—an increase of more than four times.

Also, rigs drilling for oil in the unconventional resource basins have been increasing their efficiency. This explains the increase in production. Read the following parts in the series to learn how rig efficiency increases oil and gas production.

Key Stocks and exchange-traded funds (or ETFs)

Some of the major oil and gas producers that are trying to benefit from increasing their oil-targeted drilling activities include Hess Corporation (HES), Occidental Petroleum Corporation (OXY), Marathon Oil Corporation (MRO), and Concho Resources (CXO).

Some of these companies are components of the Energy Select Sector SPDR (XLE).

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