Weekly U.S. Oil Rig Count: Shale Is Back

| About: The United (USO)

Summary

Total U.S. rig count (oil and gas) increased by ten.

Total U.S. oil rig count increased by nine.

Eight new oil rigs in shale producing regions (Barnett, Haynesville and Eagle Ford).

Three new horizontal rigs were added.

No new directional rigs were added.

A very large increase in oil rigs, with producers trying to take advantage of $50/barrel oil. This week's nine oil rig increase puts the rise over the last three weeks to 21 new oil rigs. Of the new rigs, three were horizontal, which pushes the additions over the last three weeks to twelve (not all of them necessarily oil rigs).

Apart from an increase in oil rigs in the Permian basin, the quintessential oil producing basin in the country, there were a total of six rigs added in the Barnett and Haynesville basins. These basins are known primarily for being rich in natural gas, rather than oil, and the resulting production flow will turn out to be very gassy. Even if these new rigs were classified as oil rigs, we suspect that these additions have as much to do with producers taking advantage of $2.6/mcf natural gas than taking advantage of $50/bbl oil.

Crude oil prices (NYSEARCA: USO) moved by about $0.50 at the close (14:30) most likely because of the upcoming expiration of the contract and not because of the rig count report.

Click to enlarge

Source: Finviz.com

Data:

Source: Baker Hughes

* Total U.S. oil rig count increased by nine, same as the nine rig increase posted two weeks ago. Combined with the three oil rigs added last week, that's 21 new oil rigs in the last three weeks - a very large increase, although from a historical bottom.

* Three new horizontal rigs added this week. Combined with a four rig increase posted last week, and a five rig increase two weeks ago, that's a 12 rig horizontal rig increase during the last three weeks. Not all of these rigs are necessarily oil, but most of them are.

* Natural gas rigs also increased by one, although as we have mentioned, many of the new rigs added during the week are in formations classified as 'gassy'.

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Source: Baker Hughes, Orangutan Capital

* Five new oil rigs in the Barnett basin.

* One new oil rig in the Haynesville basin.

Though these six new rigs are classified as oil rigs, the Barnett and Haynesville basins have shale formations that are very rich in natural gas. Given that natural gas prices have been depressed far longer than crude oil prices, producers have a bias towards classifying resources as 'oily' rather than 'gassy'. We think than in reality, producers are trying to take advantage of the recent surge in natural gas prices (from the sub-$2.00/mcf bottom) as much as the rise in crude oil.

* Two new rigs in the Eagle Ford basin, one of the crude oil shale basins.

* Four new rigs in the Permian, the most established oil-producing basin in the country. The rig count in the Permian is now back to March levels (which are still very low by historical standards).

Conclusion:

A lot of new rigs added this week both in the Permian and in shale producing regions. The increase in rigs in basins rich in natural gas (although the rigs themselves are classified as oil rigs) hints at an upcoming increase in the rate of additions in the following weeks. In total 21 new oil rigs have been added in the past three weeks along with 12 horizontal rigs and one directional rig. Provided that oil stays close to the $50/bbl level and that Brexit doesn't wreck the markets, we think that the bull market in oil rigs is still on.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.