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Oil rig counts decreased recently, but remain up through 2013

Ingrid Pan, CFA

U.S. oil rig count trends depend on how much companies are willing and able to spend on drilling

Rig counts represent how many rigs are actively drilling for hydrocarbons. Baker Hughes, an oilfield services company, reports rig counts weekly. The company notes that rig count trends are “governed by oil company exploration and development spending, which is influenced by the current and expected price of oil and natural gas.” So rig counts can represent how confident oil and gas producers such as ExxonMobil (XOM), ConocoPhillips (COP), Hess Corp. (HES), and Chevron (CVX) feel about the environment, as more rigs working means more spending.

(Read more: Why ethane stopped trading like crude and started trading like nat gas (part II))

Oil rig counts dropped last week, but remain elevated through 2013

The above chart shows U.S. oil rig counts from January 2005. Last week, the Baker Hughes oil rig count decreased from 1,397 to 1,382. The decrease in oil rigs drilling could signal that oil producers are feeling more negative about the current oil price environment, as they’re putting less capital to work to produce oil. Despite last week’s drop, oil rig counts remain up 5% through 2013. WTI crude prices have remained elevated throughout the year, having never dropped below $85 per barrel. Plus, WTI has traded in the $100-to-$110-per-barrel range since July, which has been positive for upstream producers.

(Read more: Why ethane stopped trading like crude and started trading like nat gas (part III))

Recently, WTI has had a strong rally for several reasons.

  1. Unrest in the Middle East has caused traders to fear supply shocks (please see Why Middle East and North Africa turmoil could cause an oil price spike)
  2. Large inventory draws have helped to alleviate the glut of crude that had built up at the oil hub at Cushing (please see Must-know: Oil prices rise to new highs on supportive inventory report
  3. Strong economic data out of the United States has indicated stronger oil demand (please see Positive U.S. manufacturing sector data boosts oil prices)

Background: Rig counts fell during the financial crisis, but have since recovered

During the 2008 crisis, oil rig counts fell significantly, as oil prices tanked and companies had more difficulty accessing financing to fund drilling. However, since then, the U.S. oil rig count has exploded, as oil prices rebounded quickly and the development of shale plays such as the Bakken in North Dakota opened up attractive opportunities for oil drilling. After the massive increase, oil rig counts fell off somewhat in 3Q12. Some market participants noted that rising costs in some rapidly developing basins incentivized producers to cut back spending somewhat. Plus, oil and gas producers may have pulled back spending in reaction to a dip in oil prices in 2Q12. However, as we’ve seen, current oil prices and rig activity indicate a bullish environment for oil drilling.

Are oil companies more positive about the current prices and operating environment?

This past week’s slight decrease in rig counts may indicate increasingly negative sentiment about oil drilling if the decrease continues. However, current oil prices remain elevated and rig activity remains up on the year. Both these factors are positive signals with regard to oil production. Note that more U.S. oil drilling is generally positive for companies across the energy spectrum with U.S. assets from producers (such as XOM, COP, HES, and CVX, as we’ve seen) to midstream companies to service companies—many of which are in the Energy Select Sector SPDR ETF (XLE).

(Read more: An Introduction to Oil and Gas Hedges: Collars)

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