Is Crude Oil Price Weakness Dragging the US Rig Count?
US crude oil rig count
Baker Hughes (BHI) reported that the weekly US crude oil rig count went down by 13 rigs, from 675 to 662, in the week ended September 4. Last week’s sharp fall dealt a blow to the turnaround signs US oil rig counts were showing. The US crude oil rig count increased eight times in the past ten weeks. Amid crude oil price volatility, a rig count turnaround looks uncertain once again.
The crude oil rig count had fallen for 29 weeks until the week ended June 26. Despite recent increases, crude oil rigs are still at their lowest levels since September 2010.
For the week ended September 4, crude oil rigs decreased in five US basins. The “other basins” category lost one more crude oil rig last week. The rigs in “other basins” are those in smaller basins or rigs that don’t fall within a specific geographic basin.
Historical perspective
The crude oil rig count is down by 947, or 59%, 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 have fallen sharply since June of last year, and they still remain on the lower side. This is good for drivers and the economy.
However, oil producers like Denbury Resources (DNR) and Marathon Oil (MRO) had to cut their rigs in operation in order to reduce costs. So, oil companies not only get lower prices for their crude oil production, but their production may also fall.
Falling active rigs would be negative for oilfield service companies like Schlumberger (SLB) and Baker Hughes (BHI). When crude oil rigs decrease like they did last week, oilfield service companies lose revenues. Lower active rigs can also affect rig operators negatively, including Nabors Industries (NBR) and Transocean (RIG), as well as rig makers like National Oilwell Varco (NOV). Nabors Industries accounts for 2.96% of the Market Vectors Oil Services ETF (OIH).
Lower rigs could lead to decreased production, which would decrease midstream energy companies’ transportation volumes. This would be negative for midstream MLPs like Plains All American Pipeline (PAA), Williams Partners (WPZ), Genesis Energy (GEL), Targa Resources Partners (NGLS), and Sunoco Logistics Partners (SXL).
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