Skip to comments.Is the U.S. Rig Count about to Enter Freefall Territory?
Posted on 12/21/2008 3:33:46 PM PST by thackney
Barely a month ago, Wall Street analysts became concerned about a drop in the U.S. rig count due to weakening commodity prices, and in particular natural gas prices, and the impact of the credit crisis on producer access to capital. The talk initially was about whether the rig count would fall by 100-200 rigs or experience a more severe correction of 300-400 rigs.
As soon as investors began to focus on the impact of the larger drop, market conditions worsened with crude oil falling to the $50 a barrel level in response to weakening global oil demand. Falling oil prices and a further tightening of credit markets caused analysts to begin to think that the rig count drop might be even greater than they had been thinking.
Recently, the view began to target the potential for a 600-rig drop during the seasonally weak early months of 2009. Last week the prospect of a 700-800 rig drop emerged as a possibility and as that view began to gain some traction, the oilfield service stocks began to dive. The Philadelphia Oil Service Index (OSX) fell Thursday by 11.06 points to 104.14, a decline of 9.6%. Intraday the OSX dropped 13.47 points to 101.73, a fall of 11.7%. It dropped further early in Fridays trading (to the 98 level) as crude oil plunged into the $41 a barrel range.
The Baker Hughes domestic rig count peaked in September and then slumped some, although some of that fall off may have been related to the impact of hurricanes Gustav and Ike on oilfield activity.
The rig count then rallied back to within 2% of the peak count before starting its current slide. In the prior two weeks (excluding the week ending December 5), the rig count has started to fall like a rock, declining by 51 and then 45 rigs. These drops were 2.6% and 2.4%, respectively, of the active rig count the prior week.
When we have written about the stock market performance of oilfield service stocks, we have focused on the similarity of their track record since the start of 2000 to that of the 1973-1983 period. We thought we would look to see how the Baker Hughes rig count fared in the same comparison. It shows a very similar pattern -- the peak in the rig count has come almost exactly to the week of that historical period peak. The rig count did not rise as much as it did in the 1970s.
What we thought would be interesting was to see how this rig count correction would look if we applied the pattern of the 1982-1983 decline period. Based on the forecast, the rig count, which peaked in September at slightly over 2,000 working rigs would fall to a low of about 1,000 rigs, or approximately a 50% correction. That pattern suggests that the estimates of the magnitude of the rig count drop might prove to be conservative.
On the other hand, the 1982-1983 rig count drop initially fell by over 2,000 rigs but then rallied by about 300 rigs. It subsequently fell by about 700-800 rigs before hitting bottom in 1983 and starting to head back up. The rig count eventually sank a lot lower in 1986 when Saudi Arabia waged its war against fellow OPEC members who were cheating on their production and crude oil prices fell to the $10 a barrel level, but thats another story.
Based on our methodology, the rig count should decline by slightly over 1,000 rigs from the peak to the trough. Since the rig count has already fallen by 165 rigs, the 800-rig drop estimate recently made by Nabors Industries could prove pretty accurate, albeit not pretty. On the other hand there is a mitigating factor that could help prevent the rig count from falling as far steeper natural gas production decline rates. Unfortunately, natural gas production continues to grow at a significantly stronger rate and forecasts call for more LNG coming to the U.S. as international gas producers will shift cargoes to here to support the gas pricing strength in Europe and Asia.
More LNG along with growing domestic production does not auger well for natural gas prices in the future, which is important to support a higher drilling rig count.
While we are not sure where the rig count may bottom out, we still are taken aback by the idea that the timing of the two rig-cycle peaks appears so close, especially when one remembers that we are talking about a 25-year gap between them. We will watch the rig count in ensuing weeks to see whether our forecast proves accurate, but it appears for the near term the direction of the rig count is straight down.
I like to buy a lifetime oil supply soon to have my own strategic reserve (as opposed to the small tactical reserve of finished product currently in use).
A “rig” being what?
North Slope projects have been shelved. Shell has also pulled out of windpower projects. It will take a while to spool up again when and if things pick up.
A drilling rig -- derrick, crew and associated equipment -- putting a hole in the ground.
Around here, in the Barnett shale, it takes a rig about 30 days to complete a well.
Oil and/or Natural Gas Well Drilling Rig
I thought I saw oil at #37.00 yesterday but http://oil-price.net/index.php?lang=en doesn’t show it today?
This can't be good.....
Normally falling or rising energy prices, OK. But instability caused by rapidly rising prices, then rapidly falling, then rapidly rising prices again will kill whatever is left of the economy. This is especially true with the credit market holding back capital except in projects with extremely certain conditions.
I hadn’t realized that the rig count had gotten that high. Of course, there have been a lot of small, shallow rigs working in Tarrant county.
I do contract work for both Halliburton and Weatherford. Well stimulation (fracturing) is still pretty brisk, as producers are trying to recover costs on recently drilled wells, but after a short period I am sure that will drop off as well.
Both of these companies main offices are now overseas.
Opec knows exactly what to do to keep us dependent, up with the price for awhile, lower it as our own activity picks up. If oil is much below 100 dollars a barrel, we cannot afford to produce it here in the US,IMO. Natural gas is faring a bit better, for now
A good number of rigs working from Franklin TX up through around Fairfield, natural gas production
Chesapeake has essentially stopped new leasing, selling off leases, and stopping drilling in the Barnett Shale, citing costs vs. income.
I think you are looking at a new front month contract. As of Friday IIRC there was about a $7 differential between January and February.
Thanks. I was way out of touch. I’d have guessed in the 800 to 1000 range. Of course, I stopped reading the Dallas News a few years ago, and it’s not info that I really need to keep up with.
NYMEX crude turns higher after weak January expiration
NYMEX February crude futures on CME’s Globex system were 66 cents higher at $43.02/barrel Monday, recovering from Friday's exceptionally weak January contract expiration as the US dollar turned lower and equity futures firmed.
The January contract expired at $33.87/b with a record low in the front spread sending the front of the curve tumbling. But with the expiration behind the market, financial market considerations moved back to the forefront of the oil market's focus.
Yes, but that month has expired. You also saw Prudhoe crude at $28.27
The Alaska budget is in trouble since 90% of State revenue is from petro, and it was costed at $75.
They are aware that a well drilled today takes up to a year before it can supply the market. Which may be back to equitable levels by that time. But that is not what is causing them to halt so suddenly.
There is something else holding them back. They are having trouble getting leases finalized on Federal lands where some of the largest reserves are found. Many of us in the industry are nervously waiting for February when the new lease sales usually occur. But it does not look so far.
Time will tell and we are crossing our fingers. The Obama administration and the Legislature, now have the political pressure of 4 dollar per gal. gas, off of their backs. Add their 2 dollar per gallon tax to slow down consumption, that spells disaster for future drilling and this industry.
Any thoughts or info to the contrary FRiend?
I would disagree with "ALL" but we have certainly seen significant cut backs already. Holding production back can become an issue with cash flow and knowledge of restart costs.
They are having trouble getting leases finalized on Federal lands where some of the largest reserves are found. Many of us in the industry are nervously waiting for February when the new lease sales usually occur.
I'm too far removed from that these days to know more than what I can read about on-line.
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