United States: Things We Rely On As A Litmus Test: The Rig Count And Hummingbird Cake

Last Updated: August 16 2016
Article by Melissa J. Lyon

There certain things we rely on in this life – things we consider absolute and reliable staples.

Sometimes, we try to use our staple items as an indicator for other things – as a sort of litmus test. We impose some kind of symbiotic relationship stemming from our staple concept and attempt to use that single factor to make a judgment about the future success or failure of something else.

For many, they rely on the U.S. rig count as an indicator of future production and the overall "health" of the oil and gas industry. According to Petropedia, the rig count is "an official listing of all of the oil and gas rigs that are operational at a certain location" and the tally "helps in collecting data that helps in analyzing several factors and indicating the status of drilling activities." We previously discussed "The U.S. Rig Count – What it means in Layman's Terms" here.

For me, baking is my staple and it is the outcome when baking a cake on a Sunday that has the ability to set the tone for my week. Case in point – the Hummingbird Cake.

  • Wait, Why Do We Rely on the Rig Count?

The answer is simple – because we always have. We have historically considered the rig count to be an indicator of production.

Some would say that with the volatility in oil prices over the past 2 years, the rig count alone is not much of an indicator of anything. In fact, we previously discussed this earlier in the spring in our post, North Dakota Stats: Reduced Rig Count Not Significantly Impacting Production. We opined that with the relatively drastic decline in the rig count in North Dakota, one would expect to see a more significant decline in production.

According to a Bloomberg article this morning entitled, Private Explorers Lead U.S. Rig Count to Longest Rally in Years, Baker Hughes Inc. is reporting that "[t]he total U.S. rig count has climbed 19 percent since bottoming out at the end of May."

The currently reported number of rotary rigs in the U.S, as of August 12, 2016, was reported to be 481. When compared to the low point in May of 404, the next question becomes does this recent increase in rig count correspond with a projected increase in production?

  • Is the Increase in the Rig Count Expected to Increase Production?

Not yet.

The U.S. Energy Information Administration ("EIA") released its Drilling Productivity Report today. A full copy of the EIA's report can be found here. According to the EIA, "[t]he Drilling Productivity Report uses recent data on the total number of drilling rigs in operation along with estimates of drilling productivity and estimated changes in production from existing oil and natural gas wells to provide estimated changes in oil and natural gas production for seven key regions." In general, the Drilling Productivity Report appears to be projecting decrease in oil production by region, from August to September this year.

  • What is the Take-Away?

In this volatile and unusual price environment, no one factor can truly be relied on to predict future production, industry highs and lows, or industry recovery. There are too many factors at play internationally to be able to pin analysis on the rig count alone.

Luckily for me, things are much less volatile and unpredictable in my kitchen and the quality of my Hummingbird Cake, an unusual cake made with oil instead of butter that contains more fruit than flour, is still a reliable indicator of how my week will go. The classic recipe filled with bananas, pineapple and spices, first submitted by Mrs. L.H. Wiggins in 1978, became one of the most requested recipes of Southern Living Magazine and it is still a staple for my life.

"Because we always have relied on this" may not work with rig counts anymore and may only work in the kitchen...

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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