Does The U.S. Oil Rig Count Still Matter?

Does The U.S. Oil Rig Count Still Matter?


A Colgate Energy LLC oil drilling rig stands in Reeves County, Texas, U.S., on Thursday, Aug. 23, 2018. Spending on water management in the Permian Basin is likely to nearly double to more than $22 billion in just five years, according to industry consultant IHS Markit. Photographer: Callaghan O’Hare/Bloomberg© 2018 Bloomberg Finance LP

Released each Friday to end the work week, the U.S. oil-directed rig count is something the entire energy business looks forward to.

As such, we all thank Baker Hughes for these numbers that tell us a good bit about the current thinking of our oil and gas industry.

Despite numerous changes in the business, particularly since the shale oil and natural gas revolution took flight in 2008, there is still a very clear connection between oil prices and the rig count, with rises for the former pushing higher numbers for the latter

Measured from -1.0 to +1.0, the Correlation Coefficient  determines the relationship between two variables. For oil prices and oil rig count, the graphic below shows a strong +0.82 connection, with both variables moving in the same direction up or down.

As oil prices go up, more rigs hit the fields. But, it can take months of rising oil prices before producers are sure enough that prices will hold before they bring additional rigs into service. And in reverse, there is a lag of course since falling prices will not immediately drag the rig count lower.

There is an obvious connection between the U.S. oil rig count and prices.Data source: Baker Hughes; EIA; JTC

As for the rig count suggesting the direction of U.S. crude oil production, our booming shale industry has simply advanced beyond it.

Although more oil rigs could obviously help grow production, fewer rigs does not necessarily indicate falling output.

Beyond just the number of rigs, increased efficiencies and lower costs for producers explain why U.S. crude production has soared to record highs of nearly 12 million b/d now.

The powerful combination of faster and better horizontal drilling and fracking has helped output explode, even when the rig count falls.

Again, the oil price collapse from 2014-2017 in particular forced the shale industry to improve operations as much as possible, or face the prospect of going out of business. This really means that the U.S. oil industry today is stronger than it ever has been. “A lean, mean crude producing machine.”

The innovations in the industry continue to surpass anything opponents claimed was possible: “Best Practices Extend Lateral Lengths.

All of this greatly complicates things for oil forecasters, who now have to look at everything from frac sand use to hiring statistics to try and decipher which direction the industry is heading. In fact,  some look at 10 or more metrics besides just the oil rig count in making their reports and predictions

U.S. crude oil production has surged, with the oil rig count seemingly unrelated.Data source: Baker Hughes; EIA; JTC





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