Baker Hughes, a GE Company, reported the North America Rotary Rig Count for January 12, 2018 increased by 15 this week. The rig count included an increase of 2 offshore rigs and 13 inland rigs exploring for oil and gas. Of those 15, 10 are exploring for oil, while 5 rigs are searching for natural gas.
Breakout information by Baker Hughes shows that New Mexico and Louisiana saw the largest increases, with 5 new rigs each. Alaska added one, and Utah increased its count by 1. Oklahoma saw its numbers increase by 3 and Colorado by 2, while Texas dropped 2 rigs.
Here is the breakout by basin:
|Major Basin Variances||This Week||+/-|
But rig counts aren’t the only indicators of oil and gas industry health. Of course, watching the price of oil is also an indicator of where the markets are headed. Peter Tertzakian, an Oilprice contributor, economist, and investment strategist, discusses what may be going on with the current situation.
While Tertzakian doesn’t exactly make a prediction about what the price of oil is going to do, he does make an interesting observation about the price of oil. He says, “Above $80 is too high. Cash flow is ample. Investors gladly fund more drilling rigs…But costs inflate quickly, too…competitiveness diminishes within the oil industry…” So although $110 oil was a boon to the industry, experience shows that its’ not sustainable. Tertzakian is right, and this cycle is in our very recent past, as oil tanked from the hundreds to well below $40.
Tertzakian notes that under $40, however, is too low. We’ve watched the markets creep back up over the last year, hitting each $10 benchmark. First $40, then $50. Would it even reach $60? Would those unfracked wells ever become productive? We saw what oil below $40 does. “Cashflow drys up and investors jump ship,” he said. “Costs deflate, rapidly decimating employees and equipment in the service industry. Production beings to decline…” We saw this, too. It’s not that far in the distant past that we reported massive layoffs and stacked rigs.
So $60 should be “perfect” as it represents “what oil pundits call ‘market balance,'” according to Tertzakian. But he reminds us that oil markets aren’t predictable, and “there is no such thing as a mid-range balancing point in oil markets. Everyone either rushes to one side of the ship or the other, almost always at the wrong time.”
So what will oil do? Keep your eyes open. At almost noon, CST, Brent is just a few cents off from $70 per barrel, and WTI Crude is at $64.04. We’ll keep an eye on the situation and keep you posted.