Democratizing tanker stocks weekly (Part 6: Oil production)

Market Realist

Continued from Part 5

Rotary rigs: A leading indicator of future production

One indicator that’s useful to investors to get a sense of the United States’s future oil production is the number of crude oil rotary rig counts, published weekly by Baker Hughes. Rotary rigs use rotating drills to dig into the Earth’s crust to find oil and create wells used to extract oil from the ground. The rig count is a leading indicator of future oil production. In 2007, the number of rotary rigs for oil used in the United States stood below 300. Today, there are close to 1,400 rigs operating on U.S. soil. The large increase in rotary rigs, which more than quadrupled, has preceded oil production in the past.

(Read more: 7 points that reflect tanker fundamentals say recovery isn’t looming (Part 2))

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US Crude Oil Rotary Rig Count 2013-08-01

The United States: Where  oil production soars

Last week, we saw a slight increase in oil rig count, which rose from 1,395 to 1,401. This suggests oil companies such as BP, Shell, Chevron, and Petrobas continue to search for oil in the United States for incremental oil supply, and it reaffirms the fact that the U.S. energy boom is here to stay. (Some domestic energy companies have benefited from this and will likely continue to do so.) It’s important to know that the level of active rigs translates to the rate of crude oil production growth—not crude production itself. So, while energy companies have stopped adding more rotary rigs in the United States, a consistently high rig count points to further growth in U.S. oil output and fewer imports.

Plus, the United States’ share of the world’s rig count rose to a new record high of 44.37% in May. Although June’s figure came in slightly lower, at 42.42%, it remains above the ratio seen in 2012. This means oil companies are spending more time and capital expenditure in the United States than they are in other parts of the world. So we can expect larger increases in U.S. oil production relative to production in other countries, which will negatively impact oil shipments overall.

This bodes negative for tanker stocks such as Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), Nordic American Tanker Ltd. (NAT), and Frontline Ltd. (FRO), as well as the Guggenheim Shipping ETF (SEA).

(Read more: 7 points that reflect tanker fundamentals say recovery isn’t looming (Part 3))

Learn more about indicators that reflect tanker fundamentals

Continue to Tanker rates (Part 7) or go back to see the list of indicators (Part 1).

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