Increase in Oil Drilling Rigs is Just Starting

Six months ago I shared this week's chart, which at that time was calling for a rise to start in the number of US drilling rigs.  Since then, the total rig count (all types) is up by 11%, but the move is just getting started.

The point of that article 6 months ago was to notice that the drilling rig count does not respond right away to changes in the near month price of crude oil futures.  Instead, there was a better correlation to the price of the futures contracts 11 months out.  And there is about a 3-month lag time in that response, which is because a claim owner has to first notice the price change, then decide to act upon it.  And the rig count is only tallied for rigs that are actually drilling, which takes a while to get started on.  The drilling company has to mobilize equipment and crew members to the site, get set up, and eventually start drilling.  3 months' lag time seems to be the magic amount of reaction time, according to these data.

There was an initial response in all crude oil futures prices to the outbreak of the US war with Iran in March 2026.  Then there was a small giveback of that initial rally, and now we are seeing the far month contract price moving up to a higher high.  Given the 3-month lag time in how oil price changes show up in rig counts, that should mean a continued rise for the rig counts going out for at least the next 3 months.

That is interesting information to know about, but we need to turn that into useful information.  So let me show you why this matters.

The VanEck Oil Services ETF (OIH) shows a very strong correlation to the US drilling rig count.  This makes sense, because the top holdings of that ETF are either drillers or companies which supply stuff to drillers and existing oilfields.  So if there is more drilling going on in the US, that means more business revenue for the companies involved, and thus their stocks do better.

If the drilling rig count is really going to keep rising as the top chart indicates, then that should be bullish for OIH, and for the stocks of companies in that industry.  Now, it is worth noting that this logic did not work out so well in 2016-18, when the rig counts rose but OIH did poorly.  That was when the fracking boom was underway in the US, which pushed down oil prices and eventually led to a crash in the rig counts.  OIH seems to have known that problem was coming. 

Apart from that one exceptional period, the correlation between rig counts and OIH share price has been strongly positive.  So there is good reason to expect more of a rise for both, given what the far month crude oil futures contract prices have been doing.

Disclaimer: This is not a trading recommendation. You are all grown ups. Do your own homework.