U.S. Markets closed

Why the Baker Hughes rig count predicts crude tanker demand

Xun Yao Chen

Essential crude tanker stock trends (Part 6 of 6)

(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.

Oil rotary rig count stagnant

On October 11, the number of active rotatory rigs in the United States stood at 1,367, down from 1,372 a week earlier. 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.

Rig count impact on future tanker profitability

As long as rig count remains high, then we would likely see further increases in oil production in the United States, 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.

Browse this series on Market Realist: