Don’t Call it a Comeback…Just Yet (Rig Counts)

by Matthew Mattingly

Over the last year or so, a hot topic in the natural gas and oil industry is U.S. rig counts. Rig counts have fallen dramatically over the last 18 months coinciding with the collapse of oil prices. Each new week brought a new low, finally hitting a bottom of 404 total rigs just a few a weeks ago. However, after seeing week over week declines for the past 18 months the Baker Hughes U.S. Rig Count report has seen increases over the past three weeks. While neither Choice Energy Services nor the ageless LL Cool J is ready to call it a comeback just yet for rig counts, the recent bullish move in commodity prices could signal a change in direction for rig counts.

As a recap, let’s remember that the Baker Hughes rig count report has traditionally been the barometer for drilling activity in North America. Historically when the report has shown a rise/fall of rigs it correlated with the rise/fall of production for oil and natural gas. But the way we look at rig counts has changed due to the shale revolution. Technology improvements, pad drilling, and sweet spot exploration have allowed producers to maintain production levels while cutting back on exploratory rigs in search of new energy resources. Choice Energy Services wrote about this fundamental change in the natural gas market in a blog entry titled “How Low Can It Go?-Rig Counts.”

The main question that was raised in the previous blog entry …when will rigs return?  Choice Energy Services discussed in the last Bulls & Bears Report that rig counts could return if oil prices consistently trade in the $45-$50/Bbl range.  See excerpt below from the report…

Producers are looking for oil to be consistently in the $45- $50/Bbl to bring rigs back on line, and current pricing is not too far away from that target range. Thus, if oil prices move up, rigs counts will increase, and more associated natural gas will become available. Additional supply will continue to keep natural gas prices deflated. However, if the opposite occurs and oil prices revert back to $30/Bbl, rigs counts will continue their further decline, and the impact of associated gas supply will be impacted as well.” –  NYMEX Update – Bulls & Bears Report

Since that report was written, oil prices have moved up.  Over the past month oil has traded in the $45-$50/Bbl range and even broke through the $50 resistance level for a couple of trading sessions. See WTI prompt month pricing below…

Blog 12 - Morningstar graph

As predicted, rig counts have started to rise with the increase in oil prices. After bottoming at 404 rigs on 05/20/2016, the rig count report has risen to 424 total rigs as of 06/17/2016. While this is just a small move, it is at least a move in the opposite direction. Furthermore, producers now have additional motives to put rigs in the ground due to the recent bullish momentum in natural gas prices. The July 2016 NYMEX contract has increased by 27% over the last few weeks, trading currently at $2.747/MMBtu. During the same time Calendar 2017 NYMEX strip pricing has increased by $0.12/MMBtu, now trading at $3.106/MMBtu. Therefore the increase we are seeing in rig counts for oil could start seeing could seeing its way to natural gas rig counts as well.

US Rig Count

It would be very premature to say that rig counts will continue this weekly climb, the increases have only occurred over the past three weeks. Thanks to bullish movements in the energy commodities market over the last month there is finally a reason to add exploratory rigs in the ground. But don’t call it a comeback just yet, rig counts still have a long way to go to match the levels of previous years, but at least it’s a change in direction for the weekly rig count.

US Rig Count Graph