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What A Falling Rig Count Can Do For Oil Prices

What A Falling Rig Count Can Do For Oil Prices

The U.S. rig count fell below 500 for the week ending on March 4, as another 13 oil and gas rigs fell victim to the oil price downturn.

According to Baker Hughes, the number of active oil rigs declined by 8, falling to a total of 392, which is the lowest level since 2009. Natural gas rigs dipped by another 5, plunging below 100 rigs. The combined total fell to 489. Related: Horizontal Land Rig Count Summary 4th March 2016

The rig count began its descent after hitting a peak in October 2014 at 1,931 (oil and gas combined), plunging to around 900 by May 2015. Over the summer of 2015, the rig count held steady as oil prices rallied from their lows in the mid-$40s to above $60 per barrel. But beginning in the third quarter, the rig count followed oil prices down again and have been in decline since then.

The more recent descent of oil prices below $30 per barrel is inducing another period of contraction in drilling activity, which is clearly visible with the rig count in free fall. Related: Big Oil Eyes Upcoming Auction In Iran

Individual shale basins are feeling the pinch to various degrees. The Eagle Ford shale in South Texas, for example, had over 200 rig counts as of late 2014. That figure has fallen to just 46 as of early March. Oil production from the Eagle Ford has declined by 0.5 million barrels per day since the middle of last year. The Permian Basin in West Texas had over 500 oil and gas rigs at the end of 2014, a level that has plunged to just 158. Oil production from the Permian has finally come to a halt, and could begin to decline through this year.

There tends to be a lag between movements in the oil price and the resulting effects on the rig count. As a result, the rig count may not rebound immediately even if oil prices rise. That means that with production in the U.S. now declining, the declines should continue at a steady pace until oil prices post a sustained rally.

By Charles Kennedy of Oilprice.com

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