The weekly Baker Hughes report detailing the falling number of U.S. oil rigs in operation has often led to buying in energy stocks. Investors assume that oil production has been falling at the same time but this is not the case. Production levels have continued to climb and as a result, record crude inventory levels are reported every Wednesday morning by the Department of Energy.
The chart below shows the seemingly-inexplicable trend – the number of active oil rigs is falling rapidly but weekly oil production continues to climb.
Rising efficiency and lower levels of exploration are the main reasons crude production has not followed the rig counts lower.
In the first case, technology advancements have led to huge gains in the amount of oil produced by individual oil wells. The Financial Times reports, "horizontal drilling, along with hydraulic fracturing, or 'fracking,' has led to big output increases in shale oil and gas production. But rig count numbers show the number of horizontal rigs has not fallen as much as other conventional rigs."
It is the inefficient, low-producing oil rigs that have been idled and the loss to production levels has been minimal.
Institutional Investor also notes that low crude prices have depressed exploration activity and this also effects the rig count without lowering production. The report quotes Tessa Sandstrom, communications manager for the North Dakota Industrial commission, "Companies are going to be looking at doing more in-fill drilling and rather less poking around to see where the oil is."
The decline in "poking around" means that a higher percentage of operating rigs are producing, rather than being used for drilling speculative holes to search for new oil supplies. This is another reason why reports of fewer oil rigs in service is not resulting in falling production.
The most recent data on U.S. oil production is for the week ending Jan. 30. It shows that while production levels are higher year-to-date, the growth has flattened off somewhat. The 9.2 million barrels per day reported at the end of January is less than one per cent higher than rate of December, 2014.
There is a very real possibility that the next report on U.S. oil production will show a year-to-date decline. This would be a bullish sign for energy investors that the fall in rig counts was beginning to bite, and that the glut in available oil that is depressing the commodity price was on the wane.
