The Philadelphia Oil Service Sector index, commonly known by its ticker OSX, is based on the stock market movements of 15 oil service company components. The current members of the OSX are Baker Hughes, Cameron, Global Industries, Halliburton, Lufkin Industries, Nabors, Noble Corporation, National Oilwell Varco, Oceaneering, Rowan Companies, Transocean, Smith International, Schlumberger, Tidewater, and Weatherford. By overlaying the OSX with the Baker Hughes US Rig Count; one can make the argument that some correlation between the two may exist.
We would expect US rig market to continue tracking OSX, albeit with a slight lag. Inflection points for the OSX in 2008 and 2009 preceded turns in the US rig count by nine and fourteen weeks, respectively. After falling 69% last year from an all-time high in June 2008, the OSX doubled in value. Similarly, a parallel but slightly less severe 57% drop in the US rig count (as tracked by Baker Hughes) has been followed with a 73% rise, which continues to date.
Most recently the OSX peaked on April 23rd at 228.22, the day after the Deepwater Horizon sank. Subsequently, the index has fallen 20% as both the broader markets have been roiled by European concerns and the oil prices have begun to re-couple with fundamentals (i.e. excess inventory levels). Crude oil has fallen 14% in recent weeks.
If the recent fall of the OSX and commodities foreshadows a similar move in the US rig count, then a pullback to 1300 rigs or a 15% decline from current level of 1518 rigs would not be a huge surprise. Of the 200 rigs that would be sidelined, a split of 45% oil and 55% gas rigs removed from the count seems plausible. From a timing stand-point this assumes that approximately 445 oil rigs and 855 gas rigs will remain active as we roll from summer into fall.
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