Is Crude Oil Price Weakness Dragging the US Rig Count?
WTI crude oil price
On Friday, September 4, Baker Hughes (BHI) disclosed the US rig count at noon. WTI (West Texas Intermediate) crude oil fell 0.43% to ~$46.13 following the disclosure.
The crude oil price was showing weakness before the data release. A few minutes after the release of the data, prices firmed up, gaining 0.11%. Last week, 13 crude oil rigs went offline compared to the week ended August 28. WTI crude oil finally closed at $46.05 per barrel on Friday, compared to the previous day’s close at $46.75 per barrel, or 1.5% lower.
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 about fourfold from 2009–2014. 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. Prices seemed to be recovering from lows in March until about June. However, prices started weakening again in July and continued to stay weak in August as crude oil rigs started to look like they were turning around.
Rigs and energy companies
Upstream companies that produce oil like Continental Resources (CLR) and Laredo Petroleum (LPI) need strong crude oil prices to increase drilling. But if they drill more in a situation of excess supply, they could pressure crude oil prices lower. Production can, however, increase even without the addition of rigs, through re-fracking and drilled-but-uncompleted wells backlog.
Oilfield services companies like Superior Energy Services (SPN) and rig equipment makers and technology providers like FMC Technologies (FTI) and Oceaneering International (OII) witnessed lower 2Q15 earnings as a result of the fall in drilling activity. So, any indication of an increase in drilling activity would be encouraging for them. FTI makes up 1.06% of the Energy Select Sector SPDR ETF (XLE).
For the latest updates, visit Market Realist’s Upstream Oil and Gas page.
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