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Who Gets Hit Hardest by Lowest US Crude Oil Rig Count Since June 2010?

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US crude oil rigs

Baker Hughes (BHI) reported that the weekly US crude oil rig count fell by 16 rigs—from 594 to 578—in the week ending October 30. The sustained fall over the past nine weeks has dealt a blow to the turnaround signs that US oil rig counts were showing. Approximately 13% of crude oil rigs have been idled in the past nine weeks. The crude oil rig count is now at its lowest point since June 2010.

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Weakness in crude oil prices

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 nine for the week ending October 30. In comparison, the four-week average fall was 12 for the week ending October 23. Four-week averages give a broader view of rig counts, as such counts can otherwise be quite volatile on a weekly basis. So, on a smoothed basis, crude oil rig count is still showing deceleration.

Historical perspective

The crude oil rig count fell by 1,031, 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.

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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 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 get lower prices for their crude oil production, but their production levels may also fall.

Falling active rigs are negative for oil field service companies such as Schlumberger (SLB) and Baker Hughes (BHI). When crude oil rigs fall as they did on the week ending October 16, oil field 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, including National Oilwell Varco (NOV). Nabors Industries accounts for 3.1% of the VanEck Vectors Oil Services ETF (OIH).

A lower amount of rigs could lead to falling production, and this 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).

Continue to the next part of this series for a related discussion of natural gas rig counts as of October 30, 2015.

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