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Are US Crude Oil Rigs Making a Comeback?

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Aug. 12 2015, Published 7:02 a.m. ET

Crude oil rig count

Baker Hughes (BHI) reported that the weekly US crude oil rig count went up by six rigs, from 664 to 670, in the week ended August 7. With last week’s rise, the US crude oil rig count has increased five times in the past six weeks. This suggests greater stability, if not a turnaround.

The crude oil rig count had fallen for 29 weeks up until the week ended June 26. Despite recent increases, the number of crude oil rigs is still at its lowest level since August 2010.

For the week ended August 7, the number of crude oil rigs increased in three US basins but fell in two.

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Historical perspective

The crude oil rig count is down by 939, or 58%, since hitting 1,609 on October 10, 2014. That week, the crude oil rig count was at its highest level since July 1987, according to Baker Hughes. Reduced activity in the oil-rich Permian Basin in West Texas drove most of the fall.

Who gains and who loses?

Crude oil prices have fallen sharply since June of last year, and they remain on the low side. This is good for drivers and for the economy.

Yet oil producers including Denbury Resources (DNR) and Marathon Oil (MRO) have had to cut the number of rigs in operation to reduce costs. So oil companies not only get lower prices for their crude oil production, but production itself may also take a hit.

A greater number of active rigs is positive for oilfield service companies such as Schlumberger (SLB) and Baker Hughes (BHI). When crude oil rig counts increased like they did last week, oilfield service companies benefit.

A greater number of active rigs can also be good for rig operators, including Nabors Industries (NBR) and Transocean (RIG), as well as rig makers such as National Oilwell Varco (NOV). Nabors Industries accounts for 3.2% of the VanEck Vectors Oil Services ETF (OIH).

More active rigs could lead to greater production, which would increase transportation volumes for midstream energy companies. This would be positive for midstream MLPs including Plains All American Pipeline (PAA), Williams Partners (WPZ), Genesis Energy (GEL), Targa Resources Partners (NGLS), and Sunoco Logistics Partners (SXL).

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