WTI crude oil price
On Friday, October 16, Baker Hughes (BHI) disclosed the US rig count at noon. The WTI (West Texas Intermediate) crude oil futures price for November expiry had been consolidating before the data release. Within five minutes of the release of the rigs data, prices fell marginally by 0.15%.
Last week, ten crude oil rigs went off-line. On October 16, WTI crude oil futures for November expiry closed at $47.26 per barrel—a 1% rise from the previous day’s close at $46.38 per barrel.
Crude oil prices and rigs
In the graph above, you can see the interdependent relationship between crude oil rigs and crude oil prices. The number of oil-targeted rigs rose about fourfold from 2009 to 2014. The associated rise in US oil production helped push crude oil prices lower last year.
As crude oil prices fell, the number of active rigs also started to fall. The sharp fall in rigs in 1H15 prompted the market to believe that production would fall soon, bringing about some support for crude oil prices and rig counts shortly thereafter.
Prices seemed to be recovering from lows in March until about June. However, prices started falling again in July and continued to stay weak until September. By the end of the second week of October, crude oil prices started to look volatile again. The number of active crude oil rigs has started to fall back into a downward trend, as we discussed in earlier parts of this series.
Rigs and energy companies
Upstream companies that produce oil such as Continental Resources (CLR) and Laredo Petroleum (LPI) need strong crude oil prices to increase drilling, but if they drill more in excess supply conditions, they could pressure crude oil prices lower. Production can, however, increase even without the addition of rigs, through the re-fracking of existing wells and through a backlog of already drilled but uncompleted wells.
Oilfield services companies and rig equipment makers such as Oceaneering International (OII) witnessed lower 2Q15 earnings as a result of the drop in drilling activity. In 3Q15, oilfield technology provider Schlumberger (SLB) reported lower earnings as North American drilling activity fell. Thus, a decrease in drilling activity would be a disappointment for its operations, too. Schlumberger makes up 7.5% of the Energy Select Sector SPDR ETF (XLE).
You can track Market Realist’s Energy and Power page for earnings coverage of some of the companies discussed in this series.