Sharp Reductions in Crude Oil Rigs Bring US Rig Count Down (Part 10 of 10)
(Continued from Part 9)
WTI crude oil prices and rig counts
Between October 10, 2014, and April 10, 2015, crude oil prices dropped from $85.82 per barrel to $51.60 per barrel, down 40% from peak activity. It’s important to keep in mind that the number of active oil rigs also reacts to prices. From October 10, 2014, to April 10, 2015, the number of active crude oil rigs dropped by 849 to 760, down 53% from peak activity.
Last week, the rig count slide picked up again even as crude oil prices looked to steady.
When prices increase, rig additions may accelerate. When prices fall, rig additions may slow down. For the number of oil rigs to fall or to show a clear downward trend, crude oil prices need to fall to levels that make drilling unprofitable. Although this rarely happens, it does occur, as demonstrated by the trend following the 2008 financial crisis.
This scenario has unfolded again recently, as we saw crude prices cut in half over the last eight months. For more on this topic, read Why 2008 crude oil prices, rigs’ fall resemble 2014 scenario.
Indeed, rigs can also affect prices. Just as the record high rigs in the last few years brought on a surge in production and the recent drop in crude prices, fewer rigs today may lead to lower production and therefore, higher prices in the future.
US producers affected by oil price
US upstream companies that produce oil, such as Continental Resources (CLR) and Hess Corporation (HES), could see lower production growth as a result of reduced drilling. Reduced activity and falling prices can also depress oilfield service companies’ profits, including Halliburton (HAL) and Baker Hughes (BHI).
Continental Resources makes up 0.28% of the Vanguard Energy ETF (VDE), and Halliburton and Baker Hughes together account for ~0.36% of the SPDR S&P 500 ETF Trust (SPY).
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