WTI crude oil prices
On Friday, November 6, Baker Hughes (BHI) disclosed the US rig count at noon. The WTI (West Texas Intermediate) crude oil futures price for December expiry had already been firming up before the data release. But within five minutes of the release of the rig count data, prices weakened and fell by 0.16%.
On November 6, after six US crude oil rigs went off-line, WTI crude oil futures for November expiry closed at $44.29 per barrel—2% lower than the previous day’s close at $45.20 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 almost 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 after that.
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 October. The number of active crude oil rigs are heading back toward a falling trend, as we discussed in earlier parts of this series.
Rigs and energy companies
Upstream companies like Continental Resources (CLR) and Laredo Petroleum (LPI) that produce oil need strong crude oil prices to increase drilling, but if they drill more in conditions of excess supply, they could pressure crude oil prices lower. However, production can rise even without the addition of rigs, through the re-fracking of existing wells and through a backlog of already drilled but uncompleted wells.
Oil field services companies and rig equipment makers such as Oceaneering International (OII) witnessed lower 3Q15 earnings. This resulted from the lower demand from the upstream industry and pricing reductions in most of Oceaneering’s oilfield services and products. In 3Q15, oil field technology provider Schlumberger (SLB) reported lower earnings as North American drilling activity fell.
Schlumberger makes up 7.8% of the Energy Select Sector SPDR ETF (XLE).