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Positive Market Sentiments: Rigs Have Likely Bottomed

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WTI crude oil price

On Friday, June 26, Baker Hughes (BHI) disclosed the US rig count at 12 PM. Just before that, WTI (West Texas Intermediate) crude oil was down 0.13% to $59.49 on anticipation of another round of weak rig count data. However, this week’s two rig additions provided a positive break. Crude oil rose 0.25% to $59.64. The rig count held around that level after the announcement.

Although the crude oil rig count fell last week, the rate of the fall has slowed down considerably in recent weeks. Compared to the previous week, the WTI crude oil price made very little movement.

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Historical movements

Between October 10, 2014, and June 26, 2015, the number of active crude oil rigs fell by 981 to 628—down 61% from peak activity. The collapse in WTI crude prices caused the sharp reduction. Crude oil prices have partially recovered since January 29. However, WTI crude is still down 44% to ~$60 per barrel on June 26, from levels close to ~$107 in July 2014.

Crude oil prices and rigs

In the above chart, you can see the interdependent relationship between crude oil rigs and crude oil prices. The number of oil-targeted rigs rose ~4x from 2009 to 2014. The associated rise in US oil production helped push crude oil prices lower. Then, after crude oil prices were suppressed in the past eight months, the rig count started to fall. This should slow crude oil production to help boost prices again.

Rigs and energy companies

US upstream companies that produce oil, like Continental Resources (CLR) and Laredo Petroleum (LPI), could see lower revenue as a result of reduced drilling. Also, these producers could suffer reduced profitability if WTI prices weaken more in the long term.

Reduced drilling activity can also depress oilfield service companies, including Core Laboratories (CLB) and C&J Energy Services (CJES). It can depress midstream MLPs (master limited partnerships) like Enterprise Products Partners (EPD), Sunoco Logistics (SXL), Enlink Midstream Partners (ENLK), and NGL Energy Partners (NGL).

Continental Resources accounts for 1.3% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

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