U.S. Oil Rig Count Advances Amid Rising Crude Prices

U.S. Oil Rig Count Advances Amid Rising Crude Prices

U.S. equities saw increased activity in the energy sector as the number of active oil rigs in the nation rose by six in the latest reporting week. This increase coincides with crude oil prices charting significant weekly gains, indicating a complex interplay of supply dynamics and market sentiment.

The Event in Detail

For the week ending September 26, U.S. firms added oil and gas rigs for the fourth consecutive week, a streak not observed since February. The total number of oil and gas drilling rigs, a key indicator of future production, climbed by seven to 549, reaching its highest level since June. Specifically, oil rigs increased by six to 424, marking the highest count since July. Conversely, gas rigs experienced a slight decline, falling by one to 117, their lowest level since July. Despite these recent gains, the overall rig count remains 38 rigs, or 6%, lower than the same period last year.

Regional shifts also contributed to the nuanced picture. The Permian Basin, the largest oil-producing shale deposit in the U.S., saw a decrease of one rig, bringing its total to 253, its lowest since September 2021. In contrast, the Utica formation gained one rig, reaching 14 (its highest since March 2023), and Ohio's rig count similarly rose by one to 13, the highest since February 2024. Baker Hughes (BKR), a prominent energy services company, reported these figures, with its stock showing an intraday gain of 0.84%.

Analysis of Market Reaction

The increase in U.S. oil rigs occurred in a period of substantial upward momentum for crude oil prices. West Texas Intermediate (WTI) crude climbed 0.95% to $65.60 per barrel, while Brent crude reached $70.70, marking the biggest weekly gain since June. This rally is largely attributed to a convergence of supply disruptions and ongoing geopolitical tensions. Russia's decision to extend its gasoline export ban until year-end 2025 and introduce partial diesel export restrictions, in response to Ukrainian drone attacks on refineries, removed approximately 500,000 barrels per day from global markets, creating an immediate supply deficit. Moscow is also reportedly considering crude output cuts as refinery damage mounts. This suggests a market reacting to structural supply stress rather than a typical commodity fluctuation.

Broader Context and Implications

The current market situation highlights a critical juncture where short-term supply constraints are driving higher prices, yet long-term structural changes point to sustained challenges. While the oil price rally has provided mixed support for energy equities, the Energy Select Sector SPDR Fund (SPDR: XLE) has delivered modest gains year-to-date, though it continues to underperform broader market indices. Higher crude prices are likely to impact inflation rates and increase costs for energy-intensive industries, prompting close monitoring by central banks globally.

Despite the recent increase in rig count, analysts anticipate a decline in U.S. oil and gas rig counts by 5% and 20% respectively in 2024. This projection stems from lower U.S. gas and oil prices in recent years, which have led energy companies to prioritize increasing shareholder returns and debt repayment over production growth.

Expert Commentary

Analysts maintain a "Moderate Buy" consensus for Baker Hughes (BKR), based on 24 analysts, with an average target price of $52.32, representing a forecasted upside of 3.59% from its current price of $50.51. The stock's P/E ratio of 16.58 is near its historical high, suggesting potential overvaluation, with the Relative Strength Index (RSI) of 75.63 indicating overbought territory.

Regarding crude prices, Raymond James analysts forecast WTI crude to average $70 per barrel through 2025, with Brent maintaining its traditional $5 premium. However, the U.S. Energy Information Administration (EIA) projects Brent crude to fall to $58 per barrel in Q4 2025 and $50 per barrel in early 2026. Similarly, JP Morgan forecasts Brent at $66 for 2025 and $58 for 2026, while Goldman Sachs expects Brent around $59 in Q4 2025, declining to $56 by late 2026. These differing forecasts reflect expectations of large inventory builds as supply growth is projected to outpace demand, with the International Energy Agency (IEA) projecting global oil inventory increases of more than 2 million barrels per day from Q3 2025 through Q1 2026.

Looking Ahead

The interplay between short-term supply shocks and long-term production trends will be crucial for the oil market. OPEC expects demand growth of 1.3 million barrels per day in 2025, nearly double the International Energy Agency's (IEA) forecast of 700,000 barrels per day. The EIA projects 900,000 barrels per day growth. However, concerns exist that OPEC+ members are delivering only about 75% of their planned increases, leading to capacity constraints. Asian economies, particularly India and China, are expected to drive virtually all global demand growth.

Central banks globally are closely monitoring these dynamics. The Federal Reserve (Fed) is expected to maintain its focus on inflation control, keeping rates elevated in the first half of 2025, with oil prices playing a critical role in U.S. inflation trends. The European Central Bank (ECB), facing weak economic growth, may adopt a more accommodative policy if oil prices remain subdued. The Reserve Bank of India (RBI), highly sensitive to oil prices due to import reliance, will remain cautious. The potential for significant inventory builds in the near future could pressure prices lower despite ongoing geopolitical tensions, warranting careful monitoring by market participants.