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What Does a 65% Fall in US Crude Oil Rig Count in a Year Mean?

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Nov. 23 2015, Published 12:28 p.m. ET

US crude oil rig count

Baker Hughes (BHI) reported that the weekly US crude oil rig count decreased by ten rigs—from 574 to 564—in the week ended November 20. In the past 12 weeks, crude oil rigs declined on 11 occasions. The sustained fall dealt a blow to the turnaround signs that US oil rig counts had been showing.

Approximately 16% of crude oil rigs have been idled in the past 12 weeks. The crude oil rig count is at the lowest point since June 2010.

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Weakness in crude oil rig count

The US crude oil rig count fell for 29 weeks until the week ended June 26. With the continued weakness in crude oil prices, a rig count turnaround looks uncertain.

The four-week average fall in the crude oil rig count was eight for the week ended November 20. In comparison, the four-week average fall was five for the week ended November 13. Four-week averages give a broader view of rig counts, as the counts can otherwise be quite volatile on a weekly basis. On a smoothed basis, the fall in crude oil rig count shows acceleration.

Historical perspective

The crude oil rig count fell by 1,045, or 65%, 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. Reduced activity in the oil-rich Permian Basin in West Texas drove most of the fall.

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Who gains and who loses?

Crude oil prices have fallen sharply since June 2014 and remain on the low side. This is potentially 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 command lower prices for their crude oil production, but their production levels may also fall.

Falling active rigs are potentially negative for oil field services companies such as Schlumberger (SLB) and Baker Hughes (BHI). However, when crude oil rigs rose as they did in the week ended November 13, oil field services companies could earn more revenues.

Lower active rigs can also affect rig operators like Nabors Industries (NBR) and Precision Drilling (PDS), as well as rig makers such as National Oilwell Varco (NOV). Nabors Industries accounts for 2.8% of the VanEck Vectors Oil Services ETF (OIH).

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

In the next part of this series, we’ll discuss natural gas rig counts as of November 20, 2015.

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