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

Tyler Durden's picture




 

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.

*  *  *

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

 

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Mon, 02/23/2015 - 14:14 | 5818944 kurzdump
kurzdump's picture

Wait a few months.

Mon, 02/23/2015 - 15:08 | 5819169 sun tzu
sun tzu's picture

After the biggest oil boom in history with rig counts and oil prices tripling in 5 years, everyone thinks the bust is over without even one marginal shale producer going bankrupt. This is like everyone thinking the housing bust was over in 2008 after a few months of declining prices. Not a drop of blood in the streets yet and everyone thinks oil will be back at $100 in a few months. The smart money like Buffet used to dead cat bounce as an opprtunity to dump Exxon and Chevron.

Mon, 02/23/2015 - 15:14 | 5819212 KnuckleDragger-X
KnuckleDragger-X's picture

You have to remember most of this was created by Wall St and the Fed throwing magic money at the oil patch and due diligence is a foriegn concept to that crowd. This is only the beginning of how it will play out.

Mon, 02/23/2015 - 14:15 | 5818945 Bloppy
Bloppy's picture

None of this commentary is approved by CNBC or Jim Cramer. Please remove immediately!

 

The surreal race to dig up every shred of O’Reilly’s past

http://tinyurl.com/n2o7xuw

 

Mon, 02/23/2015 - 16:15 | 5819502 daveO
daveO's picture

Since Ted Baxter is part of the MSM (war promotion sector), he is most likely running interference for Williams. 

Mon, 02/23/2015 - 14:16 | 5818951 kaiserhoff
kaiserhoff's picture

Proof that Peter reads ZH.

I made the point about Brent/WTI about three days ago.  The one year is more important on the arb play;)

Mon, 02/23/2015 - 14:18 | 5818962 mtndds
mtndds's picture

transitory, bullish!

Mon, 02/23/2015 - 14:22 | 5818984 Callz d Ballz
Callz d Ballz's picture

"rig" "market"

Mon, 02/23/2015 - 14:23 | 5818987 MATA HAIRY
MATA HAIRY's picture

THEY ARE LOSING MONEY ON EACH BARREL, BUT THEY ARE MAKING IT UP ON VOLUME?

Mon, 02/23/2015 - 14:40 | 5819050 disabledvet
disabledvet's picture

Taint like Richard Kinder is struggling here.

 

So "T Rex" can't run an oil company...but can make sure the political minders take it to BP?  Doesn't sound like news to me.

 

And of course who doesn't love a deal like Wall Street!

 

Who-hooo!

 

So, yeah...volume...shipping.  "Priced so low they'll be giving Maserati's away."

 

Oil for a buck, natty at twenty cents.

Mon, 02/23/2015 - 14:25 | 5818992 herman55
herman55's picture

You will gain much, much more insight into the oil markets if you tracked the service rig count. Baker Hughes does not have such a number and it is difficult to assemble an accurate count because the industry is populated by smaller companies. One to watch however is Key Energy Services. As an example they have 28 service rigs in the Bakken, as of last week 27 were still on site doing rehab workovers on wells. What that says is even at $50 oil many operators are still choosing to keep the wells pumping...adding even more oil to the market. When the service rig counts start to drop---that is the point at which a decline in crude prices will commence.........the gospel according to me.

Mon, 02/23/2015 - 14:44 | 5819068 disabledvet
disabledvet's picture

Thanks!

 

Been following MDU and their refinery build out!

 

I'm expecting about five hundred more in the next few years.  Gasoline at ten cents a gallon, propane..."just take it."

Mon, 02/23/2015 - 14:27 | 5818997 SethDealer
SethDealer's picture

rig count is about as legit as unemployment numbers

Mon, 02/23/2015 - 15:24 | 5819262 Dave
Dave's picture

The count is accurate. What it actually means is subject to a great deal of bullshit interpretation.

Mon, 02/23/2015 - 14:35 | 5819026 Vergeltung
Vergeltung's picture

finally some objective statements re "rig count".

 

Mon, 02/23/2015 - 14:37 | 5819031 Chad_the_short_...
Chad_the_short_seller's picture

Just as i read this headline, oil had a huge ramp.

Mon, 02/23/2015 - 14:37 | 5819033 wrs1
wrs1's picture

LOL! as soon as the article is posted oil moves back over $50 and almost to even on the day.   The bulls here are hardly dead and this whole storage story is as stupid as the NG storage story was in Feb 2012.

Mon, 02/23/2015 - 15:04 | 5819145 sun tzu
sun tzu's picture

NG still under $3

Mon, 02/23/2015 - 15:34 | 5819325 wrs1
wrs1's picture

Storage isn't anywhere near full nor did it ever get close to being full in 2012 but that is the same bullshit you see being touted right now with oil.

Mon, 02/23/2015 - 17:16 | 5819750 sun tzu
sun tzu's picture

What bullshit is that? There was no reason for oil to ever go from $35 to $110. Never once did someone need to buy oil and it wasn't available. So why did oil prices triple? QE Fed bubble blowing. Oil was $35 before QE1 started. Oil hit $110 during QE3. Then QE3 ended and oil prices plunge along with all other commodities. It's easier to manipulate pieces of paper like stock prices, but not so much for commodities. The physical oil, millions of bpd, needs to be refined or stored somewhere. They can try to pump futures prices to $75 or $100, but when the spot price is $50, then it blows up any manipulation. The same goes for grain, coppers, corn etc. 

Mon, 02/23/2015 - 14:37 | 5819038 chistletoe
chistletoe's picture

fat finger on crude about 5 minutes ago ....

Mon, 02/23/2015 - 15:08 | 5819173 csmith
csmith's picture

Producers are selling it forward like crazy on the recent bounce.

Mon, 02/23/2015 - 15:21 | 5819246 FreeShitter
FreeShitter's picture

Is the Pentagram the largest consumer of oil? If they are it makes alot of sense to keep it at 50.00 when war is needed.

Mon, 02/23/2015 - 15:28 | 5819286 Dave
Dave's picture

Pentagram consumes a lot but if they're not careful their war effort can easily cause $200 oil.

Mon, 02/23/2015 - 16:20 | 5819519 daveO
daveO's picture

Hey, where's that Mission Accomplished banner? 

http://www.youtube.com/watch?v=XzrJwzYBUkU

Mon, 02/23/2015 - 17:08 | 5819705 sun tzu
sun tzu's picture

Pentagram doesn't care. They will always have funding to murder people.

Mon, 02/23/2015 - 17:37 | 5819815 Youri Carma
Youri Carma's picture

Fewer oil rigs does not mean less crude, EIA says
26 January 2015, by Claudia Assis - San Francisco (MarketWatch)
http://www.marketwatch.com/story/fewer-oil-rigs-does-not-equal-less-crude-eia-says-2015-01-26

Here’s why the oil glut may continue
4 February 2015, by Claudia Assis - San Francisco (MarketWatch)
http://www.marketwatch.com/story/heres-why-the-oil-glut-may-continue-2015-02-04

Energy companies are slashing spending budgets and shutting down oil rigs, but don’t expect U.S. oil production to slow down soon.

U.S. Rigs Are Being Idled, but the Oil Boom Is Not Ending
13 February 2015, by Asjylyn Loder (Bloomberg)
http://www.bloomberg.com/news/articles/2015-02-13/rig-count-collapse-no-obstacle-to-booming-u-s-oil-output

This Chart Shows Why the Number of Oil Rigs May Not Matter Anymore
13 February 2015, by Tom Randall (Bloomberg)
http://www.bloomberg.com/news/articles/2015-02-13/this-chart-shows-why-the-number-of-oil-rigs-may-not-matter-anymore

Canadian Oil Sands Output Growth Defies Plunge in Prices: Energy
20 February 2015, by Robert Tuttle (Bloomberg)
http://www.bloomberg.com/news/articles/2015-02-20/canadian-oil-sands-output-growth-defies-plunge-in-prices-energy

Oil would have to stay between $30 and $35 a barrel for at least six months, down from about $50 now, before wells and mines are shut, according to the Canadian Energy Research Institute.

So let's get it there I hear the Arabs thinking. IAW expect lower oil prices soon.

Mon, 02/23/2015 - 17:46 | 5819890 gcjohns1971
gcjohns1971's picture

Bridge financing to boost production until price rises has never been cheaper.

Will ISIS topple the Saudi's before the banks topple the Americans before Putin nukes both other major energy producers?

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