US Crude Oil Rig Count Fell 18% in 13 Weeks: What Does It Mean?



US crude oil rig count

Baker Hughes (BHI) reported that the weekly US crude oil rig count fell by nine rigs—from 564 to 555—in the week ending November 25. In the past 13 weeks, crude oil rigs fell on 12 occasions. The sustained fall impacted the turnaround signs that US oil rig counts had been showing.

In the past 13 weeks, ~18% of the crude oil rigs have been idled. The crude oil rig count is at the lowest point since June 2010.

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Weakness in the crude oil rig count

The crude oil rig count fell for 29 weeks until the week ending 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 six for the week ending November 25. In comparison, the four-week average fall was eight for the week ending November 20. Four-week averages give a broader view of the rig counts. The rig counts can be volatile on a weekly basis. On a smoothed basis, a fall in the crude oil rig count shows deceleration.

Historical perspective

The crude oil rig count fell by 1,054, or 66%, 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. The 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 fell sharply since June 2014. They remain on the low side. This could be good for drivers and the economy. However, oil producers like 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 could also fall.

Falling active rigs are potentially negative for oil field service companies like Schlumberger (SLB) and Baker Hughes (BHI). However, when crude oil rigs rise, like they did in the week ending November 13, oil field service companies could earn more revenue.

Lower active rigs can also impact rig operators, like Nabors Industries (NBR) and Precision Drilling (PDS), as well as rig makers including National Oilwell Varco (NOV). Nabors Industries accounts for 3.3% of the VanEck Vectors Oil Services ETF (OIH).

A lower amount of rigs could lead to falling production. This would decrease the transportation volumes for midstream energy companies. This would be negative for midstream MLPs like 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 the natural gas rig counts as of November 25, 2015.


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