CAPEX Cuts Continue in the Energy Industry

October 01, 2015

As oil prices oscillate around $40, market participants continue to wonder how long these low prices will persist. The decline in oil prices, due in part to strong supply growth and lower-than-expected demand growth, has caused headaches for many in the energy industry. Energy companies have made cuts to their CAPEX (capital expenditure) levels and canceled future expansions to reduce spending and maintain low costs. This week’s chart examines the Baker Hughes United States Crude Oil Rotary Rig Counts. Rotary rig counts are often included as an input when analyzing future oil prices — the logic is that a decline in rig counts foreshadows a reduction in supply, and a rise in rig counts precipitates an increase in supply.

Since peaking in October 2014, rig counts have fallen by 60% to the lowest level in over five years. Rig counts saw 29 consecutive weeks of decline between December 2014 and June 2015. The rig counts appeared to consolidate and even ticked up after that 29-week period, with 54 rigs joining the count over a period of 8 positive weeks. This led many investors and market participants to project a continuation of downward pressure on oil prices due to the expected additional supply as a result of the added rigs. However, CAPEX cuts continue in the energy industry, as 42 rigs have come offline since the end of June (with the majority coming offline in September), almost completely reversing the effects of the increase seen in July and August. For investors and market participants, the data suggests that a bottom is forming in the rig counts and energy companies may be nearing the end of their CAPEX cuts. Whether or not this translates into an increase in oil prices remains to be seen.