Rig counts in the U.S. are back down to July, 2005 levels as crude oil prices have dropped back to the $40 range.

Baker Hughes (BHI: chart, web, Y!) has issued the rotary rig counts as a service to the petroleum industry since 1944, when Hughes Tool Company (of Howard Hughes fame) began weekly counts of US and Canadian drilling activity.

The rig count acts as a barometer for the drilling industry and its suppliers.  In effect, the more drilling rigs out making holes in the ground, the more is being spent on exploration, leaving one to believe that the industry believe oil prices justify drilling for more production.

As of last Friday (rig counts are updated at noon on the last day of the work week) the US rig count was down by 73 rigs with a total of 1,399 rotary rigs actively drilling.  Of those, 283 are being used in drilling exclusively for crude oil.

That compares to data from back in July, 2005, when 1,404 rigs were working, but at that time the count was steadily increasing.

This data indicates that the oil and gas industry doesn’t see crude oil prices rising substantially any time soon, so as not to increase capital expenditures to increase production.  In fact, most analysts are expecting a production cut by OPEC at the next meeting in March.

As for natural gas…

Baker Hughes also publishes the number of rigs used in drilling for natural gas.  That number dropped this week by 46 to 1,104 rigs.

Directional drilling has declined also, which isn’t surprising.  The cost of drilling a horizontal well is far greater than drilling a conventional straight bore well.  In this environment, there’s no point in spending top dollar only to have to shut in production due to poor economics.

Corner Office Comments

I believe crude oil will continue to trade in a $40 to $50 range for the next several months, with an occasional but short lived dip below $40.

OPEC will most certainly cut production in March, but to what effect those cuts will have on market prices for crude is uncertain.  The market has not reacted in like kind in the past, and I suspect it won’t care much about OPEC cuts this go ’round either.

Oil & Gas Baker Hughes, BHI, oil and gas, rig count