When It Comes to Oil, the Rig Count Is Important

Recently the price of West Texas Crude hit $75 a barrel, and I think before the end of the summer, we may well see $85 a barrel.

Just after Thanksgiving 2014, I wrote a commentary about the OPEC attack on the American oil industry, targeted on the frackers. On the day after Thanksgiving in 2014, WTI crude opened at $76 a barrel and over that weekend OPEC said they were attacking the American oil industry.

On February 10, 2016, the price of oil hit bottom at $26.16. OPEC’s bet didn’t pay off and they lost the war. They decided that the desire to destroy American oil interests was destroying them. At the time of the announcement in 2014, the world had 3,670 rigs on a global basis drilling for oil, based on the Baker Hughes Worldwide rig count. Over the last 20 years, rig count went from a low of 1,171 in 1999, to a high of 3,900 in February 2012.

The current rig count on a global basis is 2,096 and of that, 1,196 of the rigs in production are in North America, with 961 Rigs in the United States. Right now, 57 percent of all the oil drilling in the world is happening in North America. Next, let’s look at Saudi Arabia. According to Baker Hughes, they have 116 rigs working. In comparing the Saudi rig count to Canada, which has 189 rigs in production, Canada has 62 percent more rigs in production than the entire Saudi operation.

One may ask why the rig count is so important, which is a great question.

Oil is a depleting resource; wells will not produce at commercial levels forever. Thus, the numbers of barrels producing will decline as the amount of oil in the ground is depleted. If one wanted to keep overall production at a certain level, new drilling would be required to find more deposits to replace the oil being taken out of the ground. If new deposits are not found, then overall production will decline. Declining oil production means less revenue for everyone involved.

OPEC did not consider this issue of a long-term loss of revenue when they decide to flood the world with oil back in late 2014. The world economies were stagnating and demand fell at a time that over-production was dramatically reducing the income of the OPEC member nations. OPEC thought that the American oil industry would cave in to the OPEC pressure and shut down wells, or better yet for OPEC, many American oil companies would go bankrupt.

With an excess supply of oil and everyone pumping at the low price of oil, it was impractical to drill new wells. OPEC believed that their move would be over in a few months, and when they realized that the American oil companies didn’t go bankrupt, the longer excess oil was in the market, OPEC realized they were betting against their own countries. This was because low oil production didn’t provide the income the governments needed to fund their operations.

The oil world was turned upside down again in December 2015 when Congress lifted the ban on exporting American crude. Now, American oil companies can go out in the world markets and compete without restrictions. Today, American oil is sold all over the world. In three years, we have gone from zero exports of crude to over 2 million barrels a day and still growing. By the end of this year, American may well be the largest producer of crude in the world.

As the American and other world economies have started to recover, the demand for energy is increasing along with the possibility of a static supply, based on political and other reasons. I started off this commentary by predicting an $85 a barrel price for WTI, and unless the world doesn’t see a significant increase in the rig count, look for crude to go higher, perhaps $100 by next Spring.

If you are interested and want to follow the data on rig count, just ‘search’ on your computer ‘Rig count’ and you’ll find a link for Baker Hughes.

Dan Perkins is an author of both thrillers and children’s books. He appears on over 1,100 radio stations. Mr. Perkins appears regularly on international TV talk shows, he is current events commentator for seven blogs, and a philanthropist with his foundation for American veterans, Songs and Stories for Soldiers, Inc. More information about him, his writings, and other works are available on his website, DanPerkins.guru. To read more of his reports — Click Here Now.