Rig Count Response to Oil Prices - Can we see a trend from past data?

Since the downturn began, I have seen several reports comparing this downturn with previous downturns. As everyone knows in the oil and gas industry, this downturn has been one of the fastest decreases in oil price, rig count, frac fleets, etc in the history of the industry. In recent weeks, oil prices have hit bottom and rallied back to nearly $40. This post will look at the the response of rigs to oil price changes to determine if their is a relationship with rig count recovery.

Baker Hughes Rig Count has data that goes back to 1987. In Figure 1, I plotted Baker Hughes Weekly Rig Count versus the Weekly Price of WTI (West Texas Intermediate)  from the Energy Information Agency (EIA) from 1987 until June 5, 2020.

Figure 1: Baker Rig Count vs WTI Price - Since July 1987
(Source, Baker Hughes, EIA)

Looking at the data, you can see that there is a relationship between oil price peaks and valleys and rig count peaks and valleys. I labeled 6 points where there were clear rig count reductions. While there are multiple ups and downs in the rig count before Point 1, there isn't a relationship to oil price that can be observed.

At each point on the chart, I am going to focus on the oil price and rig count during this period. I will compare the rig count response time to the change in oil price. The goal is to understand if there is a historical relationship between the peaks and valleys of oil price and rig count. I will use a 10% increase in rig count from the rig count bottom to indicate rigs are recovering

Figure 2: Baker Rig Count vs WTI Price - Point 1
(Source, Baker Hughes, EIA)

Point 1 clearly shows that 1997 was a completely different time than today. The US Oil and Gas Industry was focused on drilling conventional formations and vertical wells in 1997. At that time, oil price peaked at $26.30 ($41.58 in 2020 dollars) in January 1997. It began a long, slow fall over 102 weeks to bottom at $11 ($17.30 in 2020 dollars) in Dec 1998. 

The time between peak oil price and peak rig count was 34 weeks. Rigs fell for 85 weeks to end at 488 rigs in the US. When oil hit a bottom of $11, it took 17 weeks for the rig count to hit bottom. The Rig Count rebounded by 10% within 5 weeks of it hitting bottom.

Figure 3: Baker Rig Count vs WTI Price - Point 2
(Source, Baker Hughes, EIA)

At point 2 (figure 3), the US Oil and Gas Industry was still focused on vertical drilling of conventional formations. WTI peaked at $35.91 ($53.47 in 2020 dollars) in Nov 2000 and fell over 52 weeks to bottom out at $18.18 ($26.33 in 2020 dollars) in Nov 2001. The Rig count peaked at 1293 rigs in July 2001 and fell to 738 rigs over 38 weeks.

The time between oil price peak and rig count price peak was 33 weeks. When oil hit bottom, it took another 19 weeks for rig count to hit bottom.The rig count rebounded by 10% within 5 weeks of hitting bottom

Figure 4: Baker Rig Count vs WTI Price - Point 3
(Source, Baker Hughes, EIA)

In July 2008, oil prices peaked at $142.52 ($169.72 in 2020 dollars). Shale gas and horizontal drilling was just beginning to catch on, with 30% of the US rigs drilling horizontal wells. The rig count peaked at 2031 rigs in Sept 2008.

Oil prices fell from $142.52 in July 2008 to $32.98 ($39.27 in 2020 dollars) in Dec 2008. Rig Count fell from 2031 rigs in Sept 2008 to 876 rigs in June 2009. During this down turn, oil prices fell quickly but the response from the rig count was much slower. This was due to the fact that operators were focusing on gas drilling rather than oil drilling. During this period gas prices fell from a peak of $13.20 per mmBTU in July 2008 to a low of $2.18 per mmBTU. Since this time gas price have rarely approached $4 per mmBTU.

The response from rig count bottom to a 10% increase from the bottom was 8 weeks during this downturn.

Figure 5: Baker Rig Count vs WTI Price - Point 4
(Source, Baker Hughes, EIA)

At Point 4 (figure 5), there does not appear to be a correlation between rig count and gas or oil prices. Oil prices during this time were in a range between $112.30 in April 2011 and $79.43 in April 2013. This was the period of transition in the industry, as we shifted from mainly vertical wells to horizontal wells. 

Figure 6: US Land Rig Count by Trajectory
(Source, Baker Hughes)

As Figure 6 shows, the percentage of rigs drilling horizontal wells went from 60% to 80%. Older rigs were being retired and new, more efficient rigs were being deployed. While there is a rig decrease, this decline is not tied to commodity prices. As we drilled more horizontal wells we could get more oil with fewer wells, resulting in a natural rig count decline.

Figure 7: Baker Rig Count vs WTI Price - Point 5
(Source, Baker Hughes, EIA)

At point 5 (figure 7), oil prices peaked at $106.69 in June of 2014 and then declined over 86 weeks to $30.02 in Feb 2016. During this period, there were a few plateaus where oil prices appeared to stabilize, with a few increase in price, but overall decrease.

Rig count peaked at 1931 rigs in Sept 2014 and fell to 404 rigs in May 2016. Rig Count followed oil prices over this time, hitting plateaus and then dropping as oil prices continued to decrease. Once the rig count finally hit bottom, it took 7 weeks for the rig count to rebound by 10%.

Figure 8: Baker Rig Count vs WTI Price - Point 6
(Source, Baker Hughes, EIA)

Point 6 (figure 8) is our current 2020 situation. With this data, you could argue that we have been in a downturn since Oct 2018 where prices peaked at $75.13. Since then both oil prices and rig count have been decreasing. 

At the start of 2020, oil prices peaked at $62.09 and hit a weekly low of $3.32 mid April. This price decrease happened over a period of 16 weeks with an especially hard fall due to COVID-19 oil consumption decreases. Over this same period rig count has dropped from 793 rigs to 284 rigs on June 5, 2020. 

Looking at the data, once oil prices hit bottom, the rig count usually hits bottom within 14 to 17 weeks. At the writing of this post, oil prices hit bottom 7 weeks ago. Due to the sharp decline, I expect rig count to hit bottom within the next 3 weeks, faster than the previous downturns. 

The data has shown that we usually see a 10% increase in rig count within 5 to 8 weeks of hitting the bottom. Assuming that the bottom rig count is near 250 rigs, we could expect to see an addition of 25 rigs through August and September. As oil prices hover near $40 and service costs stay low, it would be fairly easy to add 25 rigs across all of the basins. The true wildcard is the potential for a second wave of infections from COVID-19. If there is a negative impact on oil consumption due to a second wave, then rig count will remain depressed into 2021.