Does Oil Price Influence Drilling Activity?

Oil is the most volatile commodity in the world. Prices can fluctuate dramatically from day to day. This poses an interesting question: Because oil and gas operators have to do their capital budgeting and planning well in advance of actual drilling, does oil price actual significantly influence drilling activity? Let’s look at the chart below that compares the price of oil and the number of active rigs in the United States from January 2014 to May 2019.

We can clearly see that there is a relationship between oil prices and activity. In fact, there is a 0.84 correlation between the two, meaning there is a near-linear relationship between oil price and rig activity.

Both oil price and the number of active drilling rigs have fallen substantially over the last 5 years. Oil price has fallen over 40% from its peak and the number of active rigs has fallen even more drastically, from a peak of 1,609 to a current count of 797. This represents a 50% decrease in active rigs.

While oil prices and activity have rebounded, or at least stabilized, over the last two years, we are still very far from the levels of oil price and drilling activity of 5 years ago. Most likely, oil prices will drift downwards towards their historical inflation adjusted price. This means drilling activity will likely stay flat, or slightly decrease in the future, as well.