Crude Oil Prices Up and Oil Rigs Down
Key Update: US Rig Count down 50% in the Past Year (Part 10 of 10)
WTI crude oil prices and rig counts
Between October 10, 2014, and April 24, 2015, crude oil prices dropped 33% from $85.82 per barrel to $57.15 per barrel. The number of active oil rigs also reacts to prices. During the previously mentioned period, the number of active crude oil rigs dropped 56% from 906 to 703.
Last week, oil rigs continued to slide—31 rigs were idled. Crude oil prices increased ~3% in the week ending April 24.
Oil price and rig relationship
When crude prices increase, rig additions may accelerate. When prices fall, rig additions may slow down. For the number of oil rigs to show a clear downtrend, crude oil prices need to fall to levels that make drilling unprofitable. This happened after the 2008 financial crisis.
Recently, this scenario unfolded again. We saw crude prices cut nearly in half over the last eight months. For more on this topic, read Why 2008 crude oil prices, rigs’ fall resemble 2014 scenario.
Rig counts can also affect prices. Just as the record high rigs in the last few years brought a surge in production and the recent drop in crude prices, fewer rigs today should lead to lower production and higher prices in the future.
US producers affected by oil price
US upstream companies that produce oil, like Encana (ECA) and Hess (HES), could see lower production growth as a result of reduced drilling. Reduced activity and falling prices can also depress oilfield service companies like Weatherford International (WFT) and Oil States International (OIS). Upstream companies push for lower contract rates from oilfield services companies when energy prices fall.
Hess accounts for 1.1% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Weatherford International and Oil States International together account for 4.8% of the Market Vectors Oil Services ETF (OIH).
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