Oilfield services company Baker Hughes reported on May 21 that the weekly number of active U.S. rigs drilling for oil dropped by three to 588. In total, the active U.S. rig count, encompassing those drilling for natural gas, fell by seven to 748. Following this report, oil prices continued to rise, with the June West Texas Intermediate (WTI) crude contract trading at $71.40 a barrel, increasing by $2.84 or 4.1%, on the New York Mercantile Exchange.
Baker Hughes is a global oilfield services provider that operates in 90 countries and specializes in oil, natural gas, and geothermal energy sectors. The company has more than 34,000 employees, serving clients in upstream, midstream, and downstream sectors. Baker Hughes routinely provides rig counts to give an indication of the demand for oilfield services and products across the global energy industry. This information is significant in terms of underscoring the health of the oil and drilling sectors and influencing oil prices.
Currently, the oil market is undergoing a resurgence after a prolonged slump due to increased demand and short supplies. Recovery of the economy has significant implications for the demand of crude oil, with governments incentivizing a swifter transition to green energy policies in order to meet climate control targets. Furthermore, OPEC+ has exhibited a considerable amount of restraint when it comes to production. Contributing factors include a potential demand surge from countries such as India and Iran, as well as the increasing value of the US dollar.
There are several reasons for the decline in the number of active drilling rigs within the United States. For instance, US shale producers have limited their production capacity due to financial constraints and the focus on returning cash to shareholders. Additionally, there is increased pressure for businesses to reduce carbon emissions, limiting opportunities for exploration and production.
Despite the current reduction in the rig count, the US Energy Information Administration (EIA) has projected that overall crude production within the country will rise in 2021. This prediction was attributed to increased production from existing platforms, as well as an ongoing recovery in drilling activity. The EIA anticipates that domestic crude production will increase from 10.9 million barrels per day in 2020 to 11.8 million barrels per day by 2022.
Moreover, it should be noted that rigs drilling for natural gas, coal bed methane, and other unconventional or geothermal energy are not considered in Baker Hughes’ rig count. The count merely reflects the number of active oil rigs in the US at any given time. In fact, the total number of rigs operating across the US has dropped more than 50% since the beginning of 2014, when the price of oil peaked above $100 a barrel.
It is also important to recognize the price sensitivity of oil producers to fluctuations in the market. Generally, oil prices have been quite volatile, with pronounced declines witnessed in 2014 and 2020. High prices can incentivize the production of more expensive and unconventional sources, such as in the Canadian tar sands or the US Permian Basin, whereas low prices can depress investments in new production. It often takes time for markets to rebalance in terms of supply and demand, which can lead to further price fluctuations.
Geopolitical factors can also significantly impact the price of oil, as illustrated by the situation in Venezuela. The country has some of the largest recoverable oil reserves in the world, yet it is grappling with a severe economic crisis that has severely limited its capacity to invest in crude production. Furthermore, international sanctions have compounded the issue, negatively affecting the nation’s oil sector.
To conclude, oil prices remain an important metric for determining the health of the energy sector and the broader economy. The recent Baker Hughes report sheds light on the declining number of active drilling rigs in the US, reflecting challenges faced by oil and gas producers due to market conditions and increased pressure to reduce carbon emissions. Despite this, the EIA projects a growth in crude oil production in 2021, highlighting a potential recovery in drilling activity. Regardless of these developments, it is essential to monitor the complex interplay between geopolitical, economic, and environmental factors in order to gauge future trends in the oil market.
