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Is the US Crude Oil Rig Rally Looking Weak?

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Crude oil rig count

Baker Hughes (BHI) reported that the weekly US crude oil rig count went up by one rig, from 674 to 675, in the week ended August 28. With last week’s rise, the US crude oil rig count has increased eight times in the past nine weeks, hinting at a turnaround. However, amid crude oil price volatility, the signs of a rig count turnaround may look uncertain once again.

The crude oil rig count had fallen for 29 weeks until the week ended June 26. Despite recent increases, crude oil rigs are still at their lowest levels since October 2010.

For the week ended August 28, crude oil rigs increased in four US basins, while falling in one. The “other basins” category lost six more active crude oil rigs last week. The rigs in “other basins” are those in smaller basins or rigs that don’t fall within a specific geographic basin.

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Historical perspective  

The crude oil rig count is down by 934, or 58%, since hitting 1,609 rigs on October 10, 2014. That week, the crude oil rig count was at its highest level since July 1987, according to Baker Hughes. Lower 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 still remain on the lower side. This is good for drivers and the economy.

However, oil producers like Denbury Resources (DNR) and Marathon Oil (MRO) had to cut their rigs in operation in order to reduce costs. So oil companies not only get lower prices for their crude oil production, but their production may also fall.

Rising active rigs would be positive for oilfield service companies like Schlumberger (SLB) and Baker Hughes (BHI). When crude oil rig counts rise like they did last week, it’s beneficial for oilfield service companies. Higher active rigs can also affect rig operators positively, including Nabors Industries (NBR) and Transocean (RIG), as well as rig makers like National Oilwell Varco (NOV). Nabors Industries accounts for 3.4% of the VanEck Vectors Oil Services ETF (OIH).

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

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