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US Crude Oil Rigs Crashed 10% in 7 Weeks: Why It Matters

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US crude oil rigs

Baker Hughes (BHI) reported that the weekly US crude oil rig count decreased by ten rigs from 605 to 595 in the week ending October 16. The sustained fall in the past seven weeks dealt a blow to the turnaround signs the US oil rig counts were showing. Approximately 10% of crude oil rigs have been idled in the past seven weeks. The crude oil rig count is now at its lowest point since July 2010.

The crude oil rig count had fallen for 29 weeks until the week ending June 26. With the continued weakness in crude oil prices, a rig count turnaround looks uncertain once again.

The four-week average reduction in the crude oil rig count was 12 for the week ending October 16. In comparison, the four-week average decrease was also 12 for the week ending October 9. Four-week averages give a broader view of rig counts, which otherwise can be quite volatile on a weekly basis.

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Historical perspective

The crude oil rig count is down by 1,014, or 63%, 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 remain on the low side. This is good for drivers and the economy.

However, oil producers such as Denbury Resources (DNR) and Marathon Oil (MRO) had to reduce their rigs in operation in order to cut costs. In this kind of environment, not only do oil companies get lower prices for their crude oil production, but their production may also fall.

Falling active rigs are negative for oilfield service companies such as Schlumberger (SLB) and Baker Hughes (BHI). When crude oil rigs decrease as they did last week, oilfield service companies lose revenues.

Lower active rigs can also affect rig operators such as Nabors Industries (NBR) and Precision Drilling (PDS) as well as rig makers such as National Oilwell Varco (NOV). Nabors Industries accounts for 3.4% of the VanEck Vectors Oil Services ETF (OIH).

A lower amount of rigs could lead to decreased production, which would lower midstream energy companies’ transportation volumes. This would be negative for midstream MLPs such as Plains All American Pipeline (PAA), Williams Partners (WPZ), Genesis Energy (GEL), Targa Resources Partners (NGLS), and Sunoco Logistics Partners (SXL).

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