Just a few years ago, when the Shale Revolution had matured into the Shale Era, the world settled into a nice groove, with crude prices generally rangebound between $40 and $70/bbl. As the U.S. looked to assume OPEC+’s role and evolve into the world’s swing supplier of oil, ramping up production when prices rose and slowing it down when they fell, it seemed reasonable to expect that market-driven responses would help maintain stability. Well, things haven’t turned out that way. COVID, the emphasis on ESG, a hydrocarbon-averse administration, and Russia’s war on Ukraine combined to put “reasonable expectations” in the trash. An entirely new set of expectations is emerging, and few metrics explain it better than today’s different-as-can-be relationship between crude oil prices and the U.S. rig count, as we discuss in today’s RBN blog.
As we said in Long, Strange Trip back in 2018, the rotary rig count, compiled weekly by Baker Hughes (and its corporate predecessor, Hughes Tool Co.) since 1944, is among the most closely tracked statistics in the energy industry — and for good reason. The level of drilling activity is a leading barometer of E&P interest in increasing, maintaining or reducing production, typically with a couple months’ delay in response to shifts in crude oil (and natural gas) prices. As any student learns early on in economics class, those prices, in turn, reflect the ever-changing balances between supply and demand (and a number of other factors). And, given that Baker Hughes slices and dices its rig-count data by state, county and production basin — and by whether the rigs are oil- or gas-focused — we can anticipate shifts in where production will be occurring, and in how much oil and gas is likely to be produced in the coming weeks and months.
For many years — until COVID hit the U.S. hard in March 2020 — there was a close and consistent correlation between the two-month trailing average monthly price of WTI and the oil rig count. The left graph in Figure 1 shows this relationship between January 2013 and June 2020, with the end-month selected to show how the April 2020 price for WTI (established in March of that year) affected the rig count two months later. (The black line and right axis in the left graph shows the two-month trailing average monthly WTI price and the blue-shaded area and left axis shows the rig count). In fact, according to our analysis, the two numbers (trailing WTI and crude oil rig count) moved with a 95% correlation and that relationship was very similar when oil prices declined.
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