Source: S&P Global Platts RADAR, January 10, 2018

S&P Global Platts analyst Trey Cowan

WTI crude prices averaged $66.77 per barrel over the first three quarters
of 2019 and peaked at around $75 per barrel at the opening of 4Q18.
But as we all know, prices were punished over the rest of the quarter
shedding about $30 per barrel (from the peak) by the year’s end as traders
began to worry that global crude production appeared to be on a near term
trajectory to outpace demand.

​

A growing question culminating from the recent slump in prices is,
“How will producers adjust their drilling campaigns now that the
price environment has changed so dramatically?”

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Anecdotally we note that recent press releases by Diamondback and
Chesapeake both announced these companies’ intentions to reduce the
size of their drilling fleets in 2019. Plans for drilling by other publicly traded
producers will likely also get announced in the weeks ahead as companies report their financial results for the fourth quarter.

In the meantime, the introductory table provides a rough sensitivity
analysis of how rig demand may shape up under certain crude pricing
conditions over the next year. Comparing domestic crude prices
alongside rig activity illustrates a strong linkage (i.e. correlation)
between oil prices and rig counts.

​

Without adjusting for lag (i.e. thetypical span before rig activity reacts to the change in price), the correlation between the rig count and the WTI crude price was
0.8796, which is already a strong relationship.

However, factoring in a three month lag, improves the relationship by +855 basis points to a correlation of 0.9651 adjusted. 

This is an excerpt from S&P Global Platts RADAR, January 10, 2019 issue.

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Upstream Activity Data for North America 

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