Here’s a good visual representation of just how much production has been taken out of the oil market in the US, and why with the combined cuts out of Opec, a new supply/demand balance may indeed have finally been reached.
According to Friday’s Baker Hughes report North American drilling rig totals fell for a sixth straight week. Specifically, for the week ended February 27th, the US lost 57 rigs, mostly gas and mostly onshore Texas and Oklahoma. And according to figures from Stephen Schork of the Schork Report rig numbers are now a third below their five-year norm.
For those not quite au fait with this indicator, the number of rigs in operation can usefully reflect the strength and stability of energy prices, as rig operation is governed by oil company exploration and development spending, which in turn is influenced by the current and expected price of oil and natural gas. Since rigs are used for new wells, however, and not to pump oil or gas from existing wells, drilling activity is an indication of the immediate effort being put into development of future production.
Of real interest will be the monthly international rig count, due to be released on March 6th. The February release, which included data for January, showed total international rig counts having decreased (see chart below), but not yet to any meaningful degree.
Expectations are divided on whether international rig counts will actually trend lower for any sustained period of time, however, as natural declines in production in some areas need to be compensated for. Also worth remembering is the fact that international rig counts do not include rigs drilling in certain locations, such as Russia, the Caspian and onshore China (where many rigs would be affected in the current climate) because this information cannot be readily obtained.
In the Middle East, meanwhile, the January rig count of 274 was only one less than a year earlier indicating little change in activity.
All that said, even a flattening in the numbers would mark a significant temporary shift for global oil markets.
Related links:
A surprisingly large gasoline drawdown - FT Alphaville
Rig counts - Baker Hughes
