Market Insights: Comparing historic rig count declines

Comparing historic rig count declines

Since the peak of the last cycle almost two years ago, we have been fascinated by the rapid decline in rig counts, especially in an environment where the global demand for oil continues to increase.  The world now consumes approximately 96 million barrels per day (b/d) on an annual basis, up from 86 million b/d in 2008.  This is an increase of 12%, even in the midst of some of the worst economic times (specifically, 2008 and 2009) since the 1930s. The renewable energy revolution may be well underway, but the world has a long way to go to before oil demand begins to decline.  The global demand for oil continues to rise at an approximate annual rate of 1.3 million b/d.    

                                              Source:  International Energy Agency 

It is well known now that the recent decline in the price of oil and subsequent harsh bear market for energy companies has predominantly been an oversupply issue.  That being said, with continually rising demand, there may come a point in the near future where we see a rapid reversal (a rise in oil prices) that could surprise the majority of investors.  To show just how sharp the decline in rig counts has been this cycle, take a close look at the following chart below.  It compares this cycle to past energy bear markets.  Reversing this trend cannot be done quickly, so with supply levels that are coming in closer to balance, any number of geopolitical risks could push the price of oil much higher, much faster than perhaps the market is forecasting. 

                                                              Source:  Baker Hughes Inc., Canaccord Genuity Corp.