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Why the oil rig count crashed last week

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Oil rig count decreases

Baker Hughes’ (BHI) major basin oil rig count decreased by 29, from 1,575 to 1,546. This was the steepest decline in the past two years.

The main reductions occurred in the Permian Basin, where oil rigs fell by 21. In the Granite Wash, the oil rig count declined by five. The decrease was partially offset by “Other” basins where oil rigs increased by six. “Other” rigs are in basins that are smaller in size or that don’t fall within a specific geographic basin.

The oil rig count is now far from its highest weekly count ever. The rig count was 1,609 on October 1, which was the highest it’s been since January 2005.

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US oil price and rig count

The oil rig count has started to respond to falling oil prices in the US. By the end of last week, West Texas Intermediate’s (or WTI) oil price fell ~41% from its high in June. WTI’s price fell 8% from the beginning of the week until Friday, December 12.

If oil prices continue to decline, drillers will have less incentive to drill. Oil prices below the break-even point could even cause some upstream companies to stop operations.

Oil producers like Laredo Petroleum (LPI), Whiting Petroleum (WLL), Marathon Oil Corporation (MRO), and Continental Resources (CLR) have a higher break-even point. These companies work in some of the unconventional shales. These operations are usually more prone to oil price declines than conventional oilfields in the US. Some of these companies are part of the Energy Select Sector SPDR ETF (XLE).

Read Market Realist’s How far can crude oil prices fall? to learn more about the latest crude oil price movements.

Year-to-date (or YTD) oil rig count

Since the beginning of 2014, the number of oil rigs in operation increased by 168, or ~12%. In comparison, oil rigs increased by 93 during the same period last year. Despite this week’s sharp fall, activity in the oil-rich Permian Basin in western Texas drove most of 2014’s increase. This region added 81 oil rigs. Read Part 4 of this series for more information about the Permian rigs.

In the next part of this series, you’ll see why US gas-targeted rig counts increased.

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