A Counter Intuitive Look at Crude and Drilling
Before summarizing the offshore rig markets, we would like to take this opportunity to reframe crude oil prices and their predictive signal for future demand. The synopsis is simple: when monthly average oil prices fall over a three month period, historical data indicates a high probability that world demand for oil will be lower six months after the sell-off. We urge you to read on for the silver lining that goes along with this cloud.
We looked at average monthly WTI crude oil prices going back to the beginning of 2005 and compared these three-month changes with future world crude consumption patterns. In 62 percent (i.e. 15 of 24) of the observations occurring between December 2004 and July 2011, the global demand for crude dropped in the subsequent six months. The data was even more damning when the three-month change prices showed greater than a ten percent decline. In every one of these cases, the demand for crude was lower six months after the price decline. As we have recently experienced an 11 percent drop in oil prices, one could easily speculate on diminished oil demand in January 2012.
And now for the silver lining….
Oil prices actually showed improvement six months after their three-month decline in 20 of 24 occurrences. Specifically, we found that oil prices improved an average 15 percent, in the six months subsequent to the three-month decline in oil prices. This data implies that there is an 83 percent likelihood that WTI crude starts the year 2012 at prices averaging in the low 90s.
But, there is a significant risk that also corresponds to this data. When the minority (17 percent of the time) observations occurred, the average decline in price of oil over the subsequent six months was a staggering 40 percent plummet.
So it is against this backdrop where the odds favor oil prices improving in the next six months that we turn our focus on the offshore drilling environment. As we approach the beginning of next year, both the floater and jackup drilling rig markets are in better shape than they were at the end of last year. Both fleets have put a few stacked rigs back to work and (with the addition of newbuilds) are operating more rigs (Jackups +5 percent YTD; Floaters +6 percent YTD) than was the case at the beginning of the year.
However, the improvements that we are seeing in terms greater demand is not translating into greater operating efficiencies. After finding a trough in early 2011, both floater and jackup utilization rates have not yet rebounded to normalized levels that are typically above 80 percent. Currently, the jackup market, while gradually showing improvement, is still below 70 percent. Floater utilization across the globe is stronger at 78 percent. As there remains a significant inventory of rigs under construction, with delivery anticipated in 2012, a significant bounce in utilization rates does not appear likely next year even though the demand for rigs in general will likely continue to grow.
Average dayrates have held steady for both jackups and floaters over the past month. The average dayrate for the 329 jackups currently under contract is $107,525 per day, a slight decline from $108,090 last month. The average dayrate for the 218 floaters currently active is $386,874, up one percent versus the prior month. On a regional basis, the Latin American jackup market and floaters operating in the North Sea have shown the most improvement in pricing versus the prior month.
Looking at the raw numbers of rigs contracted overtime illustrates that the bottom of the demand cycle occurred at the beginning of 2011. As long as the price of oil remains above $70 per barrel, we at Rigzone are of the opinion that the demand for rigs will remain stable. If the odds hold true regarding oil prices at the beginning of the year, then this would points towards even higher demand for rigs than where we are currently.
The monkey wrench in our projections on rig demand involves the continued uncertainty surrounding the approval process in the Gulf of Mexico. We note that permitting for jackups domestically remains an issue that is likely preventing approximately 20 rigs from finding steady work in the Gulf of Mexico. By our conservative rough math, between 8,000 to 10,000 jobs in the gulf coast region that could come back online once the BOEMRE gets its pace back up to pre-Macondo levels. In the meantime, this presents an ongoing scheduling conundrum for operators in the region.
WHAT DO YOU THINK?
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