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Rig Count Is No Bellwether

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Rig count is no longer the bellwether predictor it used to be.

Seems these days the quick one-line assessment of anything complicated has infected analysis of the oil and gas industry. That comes to us in the form of the weekly rig count.

One and two rig differences from week to week are immediately heralded as the leading indicator that oil prices will be on the way back up – any day now.

Geez.

In the days of rapid expansion through fracking and rising prices, rig count might have been a decent leading indicator; but it’s nearly meaningless now.

The equilibrium that moves prices today is not on the production side. It’s on the consumption side – and year over year demand growth for oil and gas ain’t happening.

Meanwhile inventories consistently remain at all-time highs. While there are some regional supply interruptions countries like Iran and Iraq are increasing production. And the big valve in Saudi Arabia continues to turn counter clockwise. We’re awash in product and there’s no supply shortfall on the horizon.

The majors face enormous debt service – $184BB among Exxon, Shell, BP and Chevron alone. Cutting back existing production makes no sense. And, drilling appreciably more to expand will only add to the excess supply availability. Drilling more makes no sense. And reasonably so, few are doing it.

Instead it seems like the inventory numbers are the better barometer to watch. Put the bell on the tank gauges. When the levels go down, the prices will creep back up. Maybe after a long while, looking at rig count will again make sense.

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