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Why more efficient oil drilling is negative for crude oil tankers

Xun Yao Chen

Key crude tanker stocks updates, September 27–October 8 (Part 5 of 8)

(Continued from Part 4)

US rotatory rig count: The forefront of future oil production

The US Crude Oil Rotary Rig Count is a valuable indicator that shows how much drilling activity is occurring in the United States, tracking the number of rotating drills that are drilling into the Earth’s crust in search of oil or developing oil wells. The indicator is published by 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. As a result, its indicators reflect the forefront of the location of future oil production, which can affect US oil imports.

US Crude Oil Rotary Rig Count 2013-10-08

Oil rig count flat but well count up

On October 4, the number of active rotatory rigs in the United States stood at 1,372, up from 1,362 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 the 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.” (See Must-know: Oil prices are up but oil rigs are down since mid-year.)

The impact of a higher well count on output and tankers

According to Baker Hughes, 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.

As long as rig count remains high, then we would likely see further increases in oil production in the United States and lower imports. As long as the US energy boom isn’t over, and it can’t be filled with marginal demand by other countries, demand for crude tankers like VLCCs (very large crude carriers), Suezmax, and Aframax vessels could be negatively affected. This bodes 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.

Continue to Part 6

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