With all the talk about wall-building of late, most observers have forgotten about the other wall that used to dominate market conversations: the wall of worry. Everyone's so darn happy these days, we've neglected our old friend, the proverbial wall.
In doing my analysis today, I came across a factor that should be worrisome, but has, like so many other data points, been overshadowed by the Trump Jump: the Baker Hughes (BHI) rig count. Just released today, those figures are not bullish for oil prices, and I don't think they should be bullish for the overall market, either.
The headline figure was a 15-rig increase in the bellwether U.S. oil category. That total now sits at 566 rigs in operation in America, a 68-rig increase from the figure for the same week last year. E&P companies are back in the game, and my friends who provide services to drillers are reporting strong demand for their crews and equipment.
The great thing about the independent E&Ps is that their nimble corporate structure and focus on lease maintenance give those companies great flexibility to increase drilling quickly. Of course, one could also say the not-so-great thing about the independents is that very flexibility, as overproduction led to the nasty crash in crude prices, which reached their nadir in the first quarter of 2016.
So, are we seeing the same phenomenon? Are my wildcatter friends again killing the golden goose by running too many rigs? Not yet, in my opinion, but that is certainly something I am worried about as we move through the first quarter.
The Energy Information Administration (EIA) pegged U.S oil production last week at a rate of 8.961 million barrels per day. That's below the 9.186 million barrels per day produced in the corresponding week in 2016, but up markedly from the rate of 8.5 million barrels per day that prevailed last summer.
So the recovery has already happened. If one wants to go back to a signature date in recent oil-pricing history, one could look at the disastrous OPEC meeting of Thanksgiving 2014. In that week, the EIA measured U.S. field oil production at 9.077 million barrels per day.
It's almost as if that 18-month period -- during which the Houston bankruptcy court's docket was full to the brim and mainstream media reports of "new ghost towns" in places like the Williston Basin in North Dakota were all the rage -- didn't actually happen. It did happen, of course, and I remember it well.
We're not staring at a crash this time, not with oil sitting at $52.87 a barrel in West Texas and $55.20 a barrel at Brent. Rather, this vigorous drilling activity is more likely to result in a "pause" in oil prices. Instead of the run through $70 a barrel that seemed likely when OPEC reached its production-cap agreement in November, I believe we're going to be range-bound in the $45-$55 area for WTI for the next six months.
If the acceleration in economic growth that the broad stock markets have already priced in actually occurs, there will be some demand push toward $60 a barrel. Excellent, since we will soon enter the driving season in the U.S., which traditionally begins on Memorial Day. I believe, however, that demand push will be offset by the increasing supply of domestically produced shale oil.
So I've been taking some profits this week on the most commodity-sensitive names my firm owns -- mainly Permian rock stars Diamondback Energy (FANG) and RSP Permian (RSPP) . Net net, I'm lowering our exposure to the sector, specifically the independent E&Ps, and I'll keep a tight eye on the weekly Baker Hughes data going forward.