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The Rig Count "Meme" (And Why The Bounce In WTI Is Likely Over)

Submitted by Peter Tchir via Brean Capital,

Recently, the Baker Hughes Rig Count has become all the rage. I did a search on Bloomberg, using only Bloomberg generated articles, with “Rig” and “Count” as matches in the headline only.

Back in October, there were barely any articles at all. The number of articles increased year end, but the articles were still concentrated on the day of the announcement. The first, and so far only, Saturday article was on January 31st. There were Sunday articles on February 18th and February 15th.

The first time I talked about Rig Count in a report was back on December 19th. By the 29th it had become part of our report and things to watch for – on the 29th I sent out the info at 1:30 pm – which, believe it or not, was the first time many saw the number that day. Contrast that to more recent reports where the headlines now come out instantaneously?

Very Little "Near Term" Info

The Rig Count data is very interesting. We used it primarily to support our Jack and Diane thesis on oil and the economy – which I think is winning more and more acceptance.

Secondarily, we thought it would support the price of oil, not because it did much for supply, but because everyone would focus on it, and too many bears had shown up. I think that is exactly what happened.

WTI Pricing

Over that same period, there seems to be a loose correlation to the “rig count” meme. Oil plummeted as rigs declined, but no one seemed to notice, except maybe the experts. Then oil stabilized, and as the rig count meme picked up steam, oil spiked higher. There were lots of moving factors, but I wouldn’t discount the rig count meme completely – until now.

Rig Count since 2010

The drop in rig counts has been almost unbelievable, but it started in early December and wasn’t picked up more broadly until recently.

Yet production hasn’t been affected much at all.

DOE Domestic Crude 4 week moving average

So yes, this is a 4 week moving average, which has a smoothing effect on the data, but so far there is no sign of contraction in output.

The problem is that not all rigs are created equal, and what we see is still a “net” number. We see the net number of rigs that are working. The reality is that some new projects continue to come on line and are very high producing wells, and some of what is being taken away, was either old, or projects that hadn’t yet been contributing production.

I for one, cannot claim to know what each and every rig in America can produce, let alone the world, but I am willing to bet there is at least one person out there with a spreadsheet that does. They can estimate production very well. These are the people who have been pounding on the table that this rig count is NOT helping production much, at least for the next 3 to 6 months. They are quickly learning the lesson of trying to get a few facts to stand in the way of a good meme, but I think they are about to get listened to. Especially as

  • A Libyan pipeline is coming back on line
  • Neither the Saudi rhetoric not willingness to pump, seems to have changed
  • The “pump or die” needs of many leveraged companies is becoming more clear – some companies are in the unfortunate position of having to pump more at lower prices than at higher prices to meet cash flow needs
  • Positioning once again got too bullish

So add to my list of worries for “risk on” trades, that while oil has stabilized, the next leg is likely lower.

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Notably, the WTI front-second month contango has reached $1.50 for the first time in 4 years...

 

"Rising U.S. inventories and the threat that expanding strike action might further reduce refinery runs prompting selling at the front of the WTI crude oil curve, with April futures falling to a $1.50 discount to the May contract, and the April Brent-WTI spread probing beyond the $10 mark," says Citi Futures energy futures specialist Tim Evans