For those of us that pay attention to the Baker Hughes Rig Count, as all energy investors should, it has been an interesting month or so. After one of the most precipitous falls in the number of active rigs in America ever, the rig count bottomed out towards the end of July and has now started climbing again.
As you can see from the chart above, we are still way below the highs, and even the average, but it is now clear that the closures were a bit overdone and there is a clear upward trend emerging. That is good news for energy investors, but it may not mean what you might think in terms of where to put your money.
Most people’s reaction at seeing that would be to go out and buy some of the depressed stock in E&P companies or, if you are a bit more conservative, maybe some of the big U.S. integrated oil companies. That, however, may come up against a problem.
The reason for that big drop was essentially demand-based, and the situation there is not looking any better, and could even get worse. The U.S., and much of the rest of the world, is experiencing a serious second wave of Covid-19 infections and shutdowns, even if just on a localized basis are back in the discussion. That would quickly derail the recovery in oil demand, but even if there is not that drastic a response, the rate of recovery will at least be slowed somewhat.
So, what we will be left with is a situation where supply is increasing in anticipation of a demand surge…