Oil prices don’t change based on weekly rig count reports.
Yet every week, there are proclamations by analysts that oil prices are poised to recover because of some change in the Baker Hughes North American rig count
. Others state that U.S. tight oil production will continue to rise despite falling rig counts because of the miracle of shale rig efficiency.
What this really means is that nobody has any idea about when oil prices will rebound. As I have previously written
, that is because nothing has happened so far to cause a change in oil prices.
What can we learn from rig counts? The weekly U.S. rig count is another data point that, along with other data points, can help us to see potential trends while we wait for something meaningful to happen that causes oil prices to rise…or to fall farther. But we have to do some work with the data before we can hope to get anything from the rig count and, even then, we must not read too much into it.
First, the total North American or U.S. rig count is a practically meaningless number. Rig counts rise and fall all the time whether prices are rising or falling. In the chart below, the rig count shown in red changed weekly whether oil prices were rising or falling.
U.S. Tight oil rig count and weekly change in rig count, January 2014-February 2015. Source: Baker Hughes
This is because rig counts are tied to contracts between operators and drilling companies that are commonly somewhat long-term and may cover several rigs. Rigs generally cannot be dropped before the term of the contract ends and certainly not on a weekly basis as oil prices rise and fall. So, a company may intend to let rigs go based on low oil prices but may not be able to make that happen for some time.
Only the tight oil plays matter if we are looking for clues about a potential drop in U.S. oil production. This includes the Bakken, Eagle Ford, Permian basin, D-J Niobrara, Granite Wash, Mississippi Lime and some others. For the most part, only the horizontally drilled wells in those plays make a difference because those are the most productive wells generally.
The table below shows the current rig count (February 27, 2015) for these plays. It further shows that only the Bakken, Eagle Ford and Permian basin plays really matter in terms of total production. It further shows that for the Permian basin, vertical wells are as important for overall production as horizontal wells.
Tight oil and shale gas play rig count. Source: Baker Hughes.
This table tells us that of the 43 total rig lost this week, 25 rigs were in the tight oil plays and 21 of those were in the Bakken, Eagle Ford and Permian where it matters most.
Finally, if we look at the change in rig count for each play from the maximum in 2014, we can get some idea of how operators view the plays from a commercial perspective.
Most changed rig count by percent of all plays since the 2014 maximum. Source: Baker Hughes.
The Bakken, Permian basin and Eagle Ford tight oil plays all fall together but the Bakken and Permian (all wells) rig counts have fallen farther than the Eagle Ford and the Permian horizontal plays. Since these are trends and not weekly changes, we may infer that the Eagle Ford and Permian horizontal production may not fall as quickly as the Bakken or Permian overall production.
So, rig counts can give us an idea of the general direction of future production if we take the time to arrange and analyze them by play and by overall production contribution over a reasonable time frame. The weekly changes that so many look to for insight lamentably offer us very little.
Current rig count summary for the week ending February 27, 2015. Source: Baker Hughes.