Just about every economist says that the employment rates, ergo the unemployment rate, is a lagging indicator. The same is arguably true for the total number of rigs in oil and gas. Baker Hughes Inc. (NYSE: BHI) issued its new rig count for the month. This is still lagging, but the count of rigs has continued to drop by a substantial amount. Some might even call it shocking.
The Baker Hughes data showed a massive drop in rig counts. The global rate fell 7% from January to February, and the rate was almost a 20% decline from February 2008 to February 2009. The number of rigs fell to 2,753 rigs in February from 2,974 in January and down from 3,417 in February 2008. Those are global numbers and the U.S. situation looks to be the real bad apple here. In the U.S., the drop was 15% from January and 25% from February 2008.
As oil prices rise, more rigs are installed or turned back on. That continues after the peak as drillers try to capture higher energy prices. But now that energy prices have cratered, the rig count is still going lower and lower. Eventually, enough rigs get cut down and idled that supply is affected. Demand might be much lower, but when supply is cut over and over you eventually end up with a supply-demand gap that at least in theory drives up prices.
United States Oil Fund ETF (NYSE: USO) is up 2% with energy prices today, and it has risen since the rig count data was released. The ETF has had a hard time tracking the actual move in oil prices, but that is a different issue entirely. The Oil Services HOLDRs (NYSE: OIH) has rebounded from lows, although it is up only 0.7% at $67.38.
Has oil bottomed out? That is an answer that is up to traders and somewhat up to roll-dates. T. Boone Pickens just yesterday called $60 before under $40 in oil prices.
As the Zen master answers whether an event is good or bad: “We’ll see.”
Jon C. Ogg
March 6, 2009
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