US crude oil rig count
Baker Hughes (BHI) reported that the weekly US crude oil rig count rose by two rigs—from 572 to 574—in the week ended November 13. This represented the first rise in the count after ten weeks. The sustained fall before this week dealt a blow to the turnaround signs that US oil rig counts had been showing.
Approximately 15% of crude oil rigs have been idled in the past ten weeks. The crude oil rig count is still close to its lowest point since June 2010.
Weakness in crude oil rig count
The 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 five for the week ended November 13. In comparison, the four-week average fall was eight for the week ended November 6. Four-week averages give a broader view of rig counts as the counts can otherwise be quite volatile on a weekly basis. So, on a smoothed basis, a fall in crude oil rig count shows deceleration.
The crude oil rig count fell by 1,035, or 64%, 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 fell 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 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 service 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 service companies could earn more revenues.
Higher active rigs can also affect rig operators, like Nabors Industries (NBR) and Precision Drilling (PDS), as well as rig makers, including National Oilwell Varco (NOV). Nabors Industries accounts for 2.9% of the VanEck Vectors Oil Services ETF (OIH).
A higher amount of rigs could lead to rising production, and this would increase transportation volumes for midstream energy companies. This would be positive 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 13, 2015.