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Long Oil via the etf USO

Surely and silently domestic drilling rates have been picking up in the United States this year.  In fact, as outlined in the chart below, oil and gas rig activity is approaching the almost all time highs of 2008.  Of the two, oil drilling has been even more robust and has in fact surpassed all time highs.

Oil rigs in the domestic United States’ last peaked in activity on November 2008.  On February 1, 2010, a new post-1993 peak was established, and as of March 12th the oil rig count is now 5% above that level.

According to the Energy Information Administration:

“Half of the overall increase in rig counts since June 2009 has been in the Permian Basin of West Texas, where rigs drill primarily conventional vertical wells. Just under one-fifth of the increase has occurred in the Williston Basin, straddling Montana and North Dakota, where horizontal drilling programs have rapidly increased production from the Bakken Shale. (These two areas also accounted for about two-thirds of the drilling during the previous peak in 2008.)”

In effect, it is back to normality for the major drilling companies.  They are executing on their historical drilling plans, and investing real capital.

From a broader supply and demand perspective, there is not a whole lot read into this activity since it is in the U.S. is a small portion of global oil production (less than 10%), and the United States exports very little of its oil (less than 5% of total production).  It does, though, speak to the confidence of oil companies that we are at a price that may be sustainable.

Consistent with drilling increasing for oil domestically, days of supply has been consistently below year ago levels for the past two months.  While oil supply domestically is at or above its five year range, it is noteworthy to see supply normalize versus year ago levels – and a bullish indicator for the price of oil.

Interestingly, also as it relates to oil is the ongoing relationship with the US dollar.  Last year, the key driver for the price of oil was the weakness in the U.S. dollar.  With a negative correlation of close to 0.85, as the U.S. dollar went, so opposite went the price of oil.  In the second chart below, we chart oil versus the U.S. dollar for the last three months.  The inverse relationship has clearly broken down.  So despite oil getting more expensive in U.S. dollar terms, it keeps going up in price, which is also a bullish indicator.

We are long of oil in here, and continue to like it.

Drill Baby Drill - 1

Drill Baby Drill - NA Rotary Rig Count

Daryl G. Jones

Managing Director