20-Year Low In Rig Counts Could Fire Up Oil Prices — And These Stocks

The global rig count has hit a 20-year low, signaling a potential tightening of oil supply and possible price increases, according to the latest Baker Hughes report. This environment favors efficient, low-cost upstream producers like Diamondback Energy, Coterra Energy, EOG Resources, and Occidental Petroleum, which are positioned to benefit from strong cash flow even with reduced drilling activity. Energy ETFs such as XLE and XOP may also see renewed investor interest if crude prices rise due to supply constraints.

Analysis

The global energy landscape is signalling a potential tightening of oil supply, as highlighted by the Baker Hughes report indicating the international oil rig count (excluding North America) dropped by six rigs in May to 653, its lowest level in two decades barring the COVID-19 pandemic trough. This reduction in drilling activity, particularly in long-lead international projects, amidst steady global demand and existing OPEC+ production constraints, suggests a potential for an oil supply squeeze and a consequent surge in prices. This environment is poised to benefit upstream oil producers characterized by efficient, low-cost production models, capital discipline, and robust cash flow generation. Specifically, Diamondback Energy (FANG) is noted for its Permian Basin focus, industry-leading cost structure, and resilient profitability, evidenced by a 7% net income increase from 2014 to 2023 despite falling oil prices, even as it plans to reduce rig count. Coterra Energy (CTRA) offers diversification through its Permian oil and Marcellus shale gas assets, providing a cushion against crude price volatility. EOG Resources (EOG) stands out as a shale innovator with prime assets and a commitment to capital efficiency and per-well recoveries. Occidental Petroleum (OXY) is well-positioned due to its significant Permian presence and strategic investments in carbon capture and enhanced oil recovery. Consequently, energy-focused ETFs such as the Energy Select Sector SPDR Fund (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) may also attract renewed investor interest should these supply-side dynamics translate into higher crude oil prices.

Key Decisions for Investors

• Investors should evaluate positions in upstream producers like Diamondback Energy, Coterra Energy, EOG Resources, and Occidental Petroleum, which are highlighted for their operational efficiencies and potential to capitalize on a tighter oil market.
• Monitor global rig count data, OPEC+ production decisions, and inventory levels as key indicators for potential shifts in oil supply and subsequent price impacts.
• Consider tactical allocations to energy sector ETFs, such as XLE and XOP, if conviction grows around a sustained period of higher oil prices driven by supply constraints.