Is the U.S. Rig Count about to Enter Freefall Territory?

Barely a month ago, Wall Street analysts became concerned about a drop in the U.S. rig count due to weakening commodity prices, and in particular natural gas prices, and the impact of the credit crisis on producer access to capital. The talk initially was about whether the rig count would fall by 100-200 rigs or experience a more severe correction of 300-400 rigs.

As soon as investors began to focus on the impact of the larger drop, market conditions worsened with crude
oil falling to the $50 a barrel level in response to weakening global oil demand. Falling oil prices and a further tightening of credit markets caused analysts to begin to think that the rig count drop might be even greater than they had been thinking.


Recently, the view began to target the potential for a 600-rig drop during the seasonally weak early months of 2009. Last week the prospect of a 700-800 rig drop emerged as a possibility and as that view began to gain some traction, the oilfield service stocks began to dive. The Philadelphia Oil Service Index (OSX) fell Thursday by 11.06 points to 104.14, a decline of 9.6%. Intraday the OSX dropped 13.47 points to 101.73, a fall of 11.7%. It dropped further early in Friday