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Oil Prices and Rig Count: Vital Offshore Drilling Indicators

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Oil price crash

For the week ending June 23, 2017, oil prices fell below $45 per barrel. Oil prices touched $45 for the first time in 2017. Also, oil prices fell for the fifth consecutive week. Oil prices have fallen almost 20% since the beginning of the year. Increasing oil production from Nigeria and Libya adds to oversupply concerns. Last week, Bank of America Merill Lynch analysts said, “Oil is in a downtrend and risks trending into the $30’s.” Also, FGE’s chairman of oil and gas consultancy stated that oil prices could fall to $30 per barrel in 2018. Other analysts predict that oil prices could fall to at least $40 per barrel and in some cases in the $30’s.

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Offshore drilling companies’ fate is closely tied to oil prices. Break-even prices for offshore drilling projects have fallen substantially but are still near $50. It’s important to note that 2017 was the third consecutive year where exploration and production companies’ offshore drilling budget declined. If oil prices continue to trade at this level, it won’t be a surprise to see another fall in drilling budgets. A fall in oil prices doesn’t bode well with offshore drillers such as Seadrill (SDRL), Diamond Offshore (DO), ENSCO (ESV), Noble (NE), and Rowan Companies (RDC).

Rig count

The US offshore rig count for the week ending June 23, 2017, was 22—unchanged from the previous week. Compared to the same period last year, the rig count has risen by one. The rig count is an important yardstick for gauging the offshore drilling industry’s (XLE) demand and outlook.

In the next part, we’ll see how Wall Street analysts revised offshore drillers’ target prices last week.

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