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Why the lively US energy boom will affect oil tanker stocks

Xun Yao Chen

8 charts on US oil crucial to investing in crude tankers (Part 3 of 9)

(Continued from Part 2)

Why is the U.S. rotary rig count important?

What leads oil production? Rig count. Baker Hughes—one of the largest oilfield service companies in the world that provides products and services—publishes a rotary rig count for the United States every week. It’s a valuable indicator that impacts how much drilling activity is taking place. So it helps investors understand where future domestic oil production could be heading, which can affect tanker demand.

US Crude Oil Rotary Rig Count 2013-12-24

Strong rig count numbers

The number of active rotatory rigs in the United States stood at 1,382 on December 27, 2013—a drop from 1,395 a week ago. According to Market Realist energy analyst Ingrid Pan, oil rig counts had averaged ~1,380 for 4Q13, This was above Baker Hughes’s forecast count of 1,320, even taking into account normal year-end seasonality and drilling efficiencies.

The U.S. energy boom is alive and well

High rig count activity suggests the U.S. energy boom is alive and well, and performing even better than estimates a few months ago! Rig counts rose from 2009 to 2012 as entrepreneurs jumped into shale oil in North Dakota, South Texas, and West Texas following a temporary setback caused by the financial crisis. The count has stood relatively flat over the last one and a half years as drilling became more efficient. Current oil prices of about $100 per barrel remain quite attractive for more drilling activity and the development of oil wells.

But tankers could be negatively affected

As long as the rig count doesn’t fall substantially, we’re likely to see higher U.S. oil production over the medium to long term. If refiners switch from imported to domestic oil, demand for crude tankers would be negatively affected. This case could negatively impact tanker stocks like Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Tsakos Energy Navigation Ltd. (TNP), and Teekay Tankers Ltd. (TNK). This would also apply to the Guggenheim Shipping ETF (SEA).

Continue to Part 4

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