U.S. Markets closed

Key tanker stock drivers: Lower US rig count may not be positive

Xun Yao Chen

Key influential drivers that affect crude tankers (Part 6 of 9)

(Continued from Part 5)

Why is the US rotary rig count important?

Baker Hughes—one of the largest oilfield service companies in the world that provide products and services for drilling, formation evaluation, completion, production, and reservoir consulting—publishes a rotary rig count for the United States every week. It’s a valuable indicator that shows how much drilling activity is taking place. The indicator tracks the number of rotating drills that are drilling into the Earth’s crust to search for oil or develop oil wells. So it forecasts where future oil production will occur, which can affect the dynamics of the global oil trade.

US Crude Oil Rotary Rig Count 2013-10-20

Oil rotatory rig count in slight downtrend

The number of active rotatory rigs in the United States fell from 1,367 on October 11 to 1,361 on October 18. Even though oil prices, which reflect the demand and supply of oil, remained above $100 per barrel throughout the third quarter of 2013, the rig count has fallen ~4% since it peaked in mid-June at 1,413.

While falling rig count appears negative at first glance, the decline was driven by more efficient drilling, according to a statement from Halliburton. The company noted, “In spite of a relatively flat sequential U.S. rig count, drilling efficiencies in the trend towards multi-well pads are driving a more robust well count.”

What is well count?

Well count is an extension of the rotary rig count and tracks the number of oil or gas wells that are consumers of oil service and suppliers. So a more robust well count in the United States would mean greater output in the months ahead. While more useful, the well count is only published quarterly, which makes it better suited for drawing long-term trends rather than short-term developments.

Due to more efficient drilling and seasonality, oil rig count could fall in the fourth quarter of 2013. Yet we could see continued oil production increase as companies start using new wells to extract oil. This has happened over the past two years during the second half of the year.

High rig count means higher oil production

As long as rig count doesn’t fall significantly, then we would likely see further increases in oil production in the United States over the long term, which could negatively affect oil prices. It would also be negative on demand and rates for tankers like VLCCs (very large crude carriers), Suezmax and Aframax vessels.

This bodes medium- or long-term negatively for tanker stocks such as Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Tsakos Energy Navigation Ltd. (TNP), and Teekay Tankers Ltd. (TNK). The Guggenheim Shipping ETF (SEA) will also be negatively affected. However, investors should also take a look at how much US production will increase, how much it will replace imports, and how much China—the other major player—will import.

Continue to Part 7

Browse this series on Market Realist: