Our Rig Count Keeps Dropping, Despite Rising Oil (BHI, OIL, USO)

Baker Hughes Inc. (NYSE: BHI) has just released its weekly total rig counts for the US and Canada and for offshore rigs.  Despite the notion that oil is now back above $50.00 and calls to get off foreign energy dependence, the drilling rigs in North America are continuing to be cut. And cut.  And cut.  Hell, Canada looks like it is getting out of the oil industry entirely.  Here are this week’s new rig counts showing how far these keep getting idled:

• U.S. Rig Count down 41 from last week at 1,085; down 699 year over year.
• Canadian Rig Count down 61 from last week at 159; down 169 year over year.
• The US Offshore rig count is 43, down 4 from last week; down 14 year over year.

The iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL) was up 0.5% but has gone back to flat, and the US OIL ETF (NYSE: USO) was up 0.5% but has rolled over into almost negative territory.  On last look, spot oil from NYMEX was at $51.18.

T. Boone Pickens recently made the call of “$60 before $40” when oil was barely above $40.00 at the time.  If these rig counts keep dropping at the same rates that we have been seeing, then OPEC won’t ever have to debate whether they should be cutting production.  The production cuts are happening right here despite our calls to get off foreign energy.

Demand erosion has continued for oil, but not at the same pace that these rig counts keep coming down.  It seems that the old days of being profitable at $20  are toast.  Some companies don’t even make money at $50 oil on many of their newer operations.  At least that is what they say.

We won’t hold our breath for this to occur, but maybe the new powers that be will ultimately give some new drilling incentives.   Whether we want to end up entirely using solar and nuclear and other forms of alternative energy entirely, the reality is that oil use is going to be around as long as we are all still alive.  The question is just how much of it will be used.  It looks like foreign energy dependence is going to continue, so you might as well capitalize off of it.

Jon C. Ogg
March 20, 2009