The number of active oil rigs dropped slightly in the past week, which will likely give an additional boost to crude prices in the near-term as major oil exporters prepare to meet in Qatar to consider capping production.
A deal could have an immediate positive effect, but a drop of 514 in the number of active rigs in the past year -- signaling a continued slow-down in U.S. production -- stands to benefit energy companies from explorers and producers like Exxon Mobil (XOM - Get Report) to oilfield services companies like Baker Hughes (BH - Get Report) and Halliburton (HAL - Get Report) the most in the long haul. Crude oil fell below $40 per barrel Friday with doubts hovering over the likelihood of a freeze and concerns that Iran would not attend OPEC's meeting in Doha on Sunday.
Speculation concerning a possible production freeze by 55% of the world's oil producers influenced the stock markets earlier this week, and it has been a major talking point for most of April.
"The bottom line is, if we get a freeze agreement this weekend, we would expect a positive reaction in the crude markets," Cantor Fitzgerald analyst Brad Carpenter wrote in a research note Friday. "However, from our perspective, any agreement would not change the near-term bearish fundamentals facing prices -- and these forces could ultimately regain control over crude markets."
Shortly after Baker Hughes' weekly report was released Friday, showing a reduction of 3 oil rigs and no change in the number of natural gas rigs from last week, service providers such as Baker Hughes, Halliburton and industry-leading Schlumberger (SLB - Get Report) moved only incrementally, while shares of top-tier U.S. producers like Occidental Petroleum (OXY - Get Report) , EOG Resources (EOG - Get Report) , Anadarko Petroleum (APC) , and Apache (APA - Get Report) were largely undisturbed.
Today's counts represent a blip on the radar for oilfield services companies, considering producers have been reducing active rotary rigs drastically for the past 18 months, according to KeyBanc Capital Markets analyst Robin Shoemaker, who follows the oilfield service industry.
The count of active U.S. oil rigs has fallen from more than 1,600 in early 2015 to 351 on Friday. The number of natural gas rigs held this week at 89.
"Right now, people are watching the oil price very carefully," Shoemaker says. "That's really the driver."
The analyst says quarterly earnings reports, which the industry expects will begin next Friday, are the next important factor to consider.
"When the first major E&P companies add a rig to their fleet, that will be the tell-tale sign," he said prior to the rig report's release. "But I don't see any evidence of that going on now."
Topeka Capital Markets analyst Gabriele Sorbara agrees; he said in an interview that he expects the rig count to continue to decline steadily for the foreseeable future. Until oil prices stabilize between $40 to $45 a barrel for a month or two, at the very least, the likelihood that producers add rigs is slim.
And the exploration- and production-focused analyst doesn't expect that to occur through the end of 2016, as companies continue to decrease output to save capital.
If prices do stabilize in the near future, plenty of the major players have a significant backlog of drilled but uncompleted wells. Cantor Fitzgerald's Carpenter says there are more than 4,000 such wells in the U.S., meaning an excess of 3,000 compared with normal inventory.
That means producers don't necessarily need to activate more rigs to marginally ramp up production. Another factor is the lag between an uptick in active rigs and an increase in oil and gas production, Sorbara says.
Right now, there are 440 active oil and gas rigs in the U.S., and the Energy Information Administration is predicting oil production will continue to decline to below 8,000 barrels per day through late 2017.
Sorbara said those numbers are slightly conservative because the industry hasn't felt the full effect of the downturn just yet.
"We need to see more pain in this industry before we rebound," he said.
While the market won't fluctuate much on the news of three less rigs, analysts say production companies focused on tapping oil in the Bakken and Eagle Ford shale formations are most likely to continue seeing share prices fall.
And Carpenter wrote in a research note earlier this month that he expects very few stock-specific catalysts at all within his coverage group, which includes mid-cap players like Newfield Exploration (NFX) and PDC Energy (PDCE - Get Report) .
The decline in U.S. oil production through year-end 2016 will ultimately begin to stabilize the markets, he said in a Friday note, adding that U.S. supply has already started to turn over.
"But any rapid rise in West Texas Intermediate crude [strip prices] could make the rally self-defeating," he wrote, "if U.S. producers ramp activity and/or begin working through the drilled-but-uncompleted inventory."
Going forward it will be interesting to see if some producers take the bait of encouraging oil prices, like many did in 2015 when crude saw a brief bump, Carpenter says.
That move would certainly be a market driver for U.S. oil producers, but Carpenter warns that the sector is more likely to err on the side of caution this time around.
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