Stock Market Today: Is Oil Following the Natural Gas Playbook?

One of the most notable oil “bullish” memes floating around the trading pits is all about declining rig counts in the United States, and how the falling number of drilling operations is a “game changer” for the oil markets that ultimately will lead to a bottom in energy prices.

That meme, however, is simply not true, and history backs this claim up.

First, while rig counts have indeed dropped from a recent high of 1,931 in September to 1,675 as of last week, this doesn’t necessarily mean lower oil supply in the pipeline. Though this may seem bullish on the surface, it actually isn’t, and that’s because total US production is still expected to rise between 5% and 10% next year. The reason is because the rigs that are being shut down are low-production/exploratory-type rigs that don’t contribute to a lot of production anyway.

Second, many analysts are focused on oil producers’ published “break-even” prices as they try to pinpoint a fundamental price floor (many of which we have already crashed through). But, there is speculation that a lot of those published numbers are misleading, and that as prices continue to fall producers will only try to pump more in an effort to stay profitable.

Put simply—the producers often lie about where their “break even” really is.

Supporting this idea is the recent history in the natural gas market, which saw production boom in the last several years cause prices to plummet, much like we have seen in the global crude oil market over the past six months.