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RIGGED

The oil patch rig count is down, but only technically speaking

Reuters/Gary Cameron
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Oil prices surged today as traders learned that the work of yet more rigs has been halted on the US shale oil patch. Baker Hughes, which keeps track of rigs operating in the field, reported that the count dropped below 1,000 for the first time since June 2011. At 986, the number of rigs is now down almost 39% since October.

The oil optimists not only sense that supply is contracting—in the US, as well as in Iraq and Libya—but see glimmers of rising oil demand, possibly justifying a bottom to a months-long price plunge.

Yet supply disruptions, especially in war zones, can be ephemeral and snap back. And, as we’ve written, rig-counting is tricky business, because drillers can withdraw any amount of equipment from the margins of a field while keeping other rigs working in the most productive areas.

On the latter point, Citi has surfaced with some surprising data regarding the rig count within the shale oil patch, which almost totally accounts for the 4-million-barrel-a-day increase in US production since 2011. According to Citi, if you take into account the 20% rise in drilling productivity across the main shale oil fields, the number of rigs has actually increased since last year—substantially so.

Citi’s report was written prior to today’s release of rig data, but the numbers don’t change the conclusions. The bank calculated that, yes, the absolute number of horizontal oil rigs was down year on year as of last week, to 377 from 386 last year. But adjusting for productivity, it was as though 452 rigs were drilling at 2014 rates, equal to a 17% increase.

Likewise, when Citi broadened out its survey and looked at horizontal oil and gas rigs, it found an absolute drop to 641 rigs compared with 711 at this time last year. But taking into account the productivity gain, it was as though there were 770 horizontals, which would represent a 20% increase.

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