Multiple times a week you see us mention something about U.S. oil rigs, or a drill count report, or Baker Hughes data. What exactly are we talking about? Well, let’s take a broad look at oil and natural gas production here in the U.S. To start, America ranks #1 globally in natural gas production, and #3 in crude oil production. How did the U.S. attain these levels? Well, there are seven main regions from which our production stems: Bakken, Niobrara, Permian, Eagle Ford, Haynesville, and in our geographic region, the Utica and Marcellus. These seven regions account for roughly 94% of domestic oil production and all of the natural gas production. According to EIA.gov, the Permian region currently trumps all other regions in crude oil production at almost 1.8 million bbls/day, while the Marcellus shale leads the natural gas pack at nearly 17 billion cubic feet/day.
Speaking of the EIA, each week the EIA comes out with an oil production report for the U.S. Additionally, each Friday, Baker Hughes releases a rig count report which summarizes the prior week’s domestic crude production activity. When you see us mentioning rigs either coming online or going offline, what we mean is that rigs are either drilling or not. There are many factors which contribute to rigs shutting down or turning on including: natural disasters, skilled workers, and drilling efficiency, but nothing is more influential than the price of crude oil and natural gas. The past two years clearly prove the relationship between the price of crude and the number of active drilling rigs. According to Baker Hughes from Friday, oil rigs were up 14 to 371, yet there are 288 fewer rigs online than this time last year. Moreover, the number of natural gas rigs is at 90, 128 lower than last year. As you can see, there are roughly 460 active rigs for both natural gas and oil in North America currently. To put this into perspective, in August 2014 when crude oil was around $100/bbl, there were close to 1,925 rigs in operation, and the highest number recorded was just north of 4,400 rigs online in January of 1982.
Now what came first, the chicken or the egg? As the chart shows, the price of crude significantly affects the number of active rigs, both oil and gas. However, turn that equation around, and the number of rigs online affects the price of crude! An increase in the number of rigs online increases production and therefore increases supply. As we know, an increase of supply, ceteris paribus, decreases the price of oil. Last week we saw an increase in domestic drilling rigs, and this morning the market is down. Crude is down $0.98, ULSD is down $0.0297 and RBOB is down $0.0249 to its lowest level since March. Yes, there are a handful of just as impactful factors that contributed to today’s lower prices, such as a stronger U.S. dollar index, but the number of active drilling rigs in the U.S. should not go overlooked.
Locally, the numbers of rigs last week in PA, WV, and OH were completely unchanged. Speculators would think this would not be the case considering that the price of natural gas is strong lately; however rigs are still not coming back online. Additionally, from an oil perspective, continue to keep an eye on gasoline prices. EIA data and EPA data show record length in gasoline inventories as well as record monthly generations of renewable identification numbers (RINs). Gasoline prices could remain weak as we near the end of the busy driving season.