The U.S. oil and gas rig count continues to fall – having plummeted by 74 rigs for the week ending on January 16 – in a clear sign that the contraction will likely persist for some time.
A fresh wave of layoffs and spending cuts were announced this past week. Baker Hughes (NYSE: BHI) said that it would slash 7,000 from its payrolls, for example.
Oil Prices Go Down…And Back Up
As rigs and roughnecks disappear from the oil patch, production will decline. However, it will not decline right away – there tends to be several month lag period between a reduced rig count and slower production. That period of time could be about two to five months, meaning U.S. oil production could begin to feel the pinch in second quarter.
There are a series of other signs that would indicate that oil prices are bottoming out. Although one data point doesn’t confirm a trend, U.S. oil production fell by 6,000 barrels per day during the second week of January. More cutbacks will eventually correct a supply glut.
OPEC’s Secretary-General spoke at the Davos World Economic Forum and said that he thinks prices will stabilize in the $45 to $50 range and then rebound. OPEC is also predicting that low oil prices will stoke demand, which should send prices back up. Early signs from the U.S. reaffirm this view – U.S. gasoline demand is at an all-time high.
Capitalizing on the Rebound
There is a huge opportunity for investors…