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Why The Oil Rig Count Can Be A Good Idea

By Louis H-P on September 13, 2022

Reading Time: 4 minutes

Inventors look for all sorts of ways to gain an advantage. Those investing in oil are known to do an oil rig count. The theory is simple, a high number of oil rigs in storage means lack of demand. No oil rigs means the opposite, oil demand is soaring. Yet how  can we apply this theory to other types of investments? 

Key Takeaways

What is the oil rig count and why it helps you

How you can apply it to other sectors

Risks you should be aware of


What the oil rig count tells us

Simply, what the demand for oil is. There is a closely watched report in the US, which counts the number of oil rigs in use. Indeed in Britain the amount of oil rigs found in the firth near Invergordon can also be used for this purposes. As the picture below (taken in 2021) shows, this is one of the areas in Britain where oil rigs end up when not in use.

The oil rig count is simple: count the amount of mothballed oil rigs

A high number of rigs in the firth is an indication of a lack of demand for oil. For those trading oil, it can be an advantage to have this information to hand.

How we can learn from the oil rig count

Counting rigs can be applied to other industries. Boeing has had a torrid recent period after problems with the 737 Max as is reflected in the dismal share price performance below:


Yet as one of the world’s largest airplane manufacturers and as we exit Covid restrictions, demand for their aircraft is likely to recover. In the meantime Boeing has had to park aircraft wherever it can, including the employee car park.

One approach to identify if Boeing is managing to sell these aircraft, (and therefore if the share price recovers) is to count the number of planes left each month in the car park! You could also calculate (using a %) how quickly planes are leaving the car park. This would show an acceleration in demand.

Apply this to war… and investing

Anyone who knew a little of history or had watched/studied Putin’s approach to geopolitics since 2008 could have predicted the war in Ukraine. Indeed, the narrative in Western papers pre the invasion was decidedly negative vis-a-vis an invasion despite the signs being there.

This was also reflected in markets which had not priced in an invasion. Although the oil and gold price were reflecting a strong possibility of a war, there was ample opportunity to profit from going short in the main stock markets pre the 24th of February.

Indeed, the approach of using circumstantial evidence for decision-making is not new. During the cold war the Soviet Union would check, using satellite pictures, the Lockheed Skunk works car parks. (This was where the original stealth fighter was developed). The Soviets suspected this was the centre of American secret weapons. Car parks which were regularly full meant a new weapon system was being developed!

Risk of miscalculation

You need to be cautious and have some experience with data before acting on circumstantial evidence. The expression ‘Garbage in, garbage out’ springs to mind. This means that the data you are using may be poor, and as a result the conclusion you draw will be equally as poor.

Using our oil rig example, a higher number of oil rigs in one of the Scottish firths may not be related to oil demand. It could be companies wanting to protect their rigs from seasonal bad weather and/or doing yearly maintenance. Either way, ensure you research why there is a higher number of oil rigs, do not assume it supports your theory.

This caution should also apply to the our example of counting planes at Boeing field or Renton. The aircraft leaving could be ones previously ordered and are therefore not necessarily representative of current demand for Boeing’s aircraft.

How you can do your own research

You can apply this to other sectors, for example the retail sector. The amount of footfall, i.e. people walking the streets can highlight how much consumers are likely to spend in shops.

In the UK the Office of National Statistics provides data on all sorts of industry and human trends through statistical reports. You can research certain statistical sets to find trends which provide you with an investment opportunity.

In the USA, the federal governments provider of statistics is the the US Bureau of Labor statistics. Again it provides all sorts of data sets with regard the state of the USA’s economy.

Some closely followed data sets are not found in quasi-government departments but in the private sector. For example in the UK, the Nationwide house price index is often quoted by reputable news organisations with regard the state of the UK housing market.

Conclusion

It is never written in black and white that there is a good investment or trading opportunity to be had. It is up to you to find it. Spotting trends in the data can help. Often though, your ‘Mark 1 eyeball’ (i.e. your eyes) can be the biggest help in spotting something interesting.

Regularly keeping your eyes open will help you spot people’s habits. If people’s habits change, then their spending habits will also change. This may not be fully reflected in a securities’ price and is therefore an opportunity for you.

This observation should then feed into your curiosity to find out more and whether the data supports your ‘gut feel’.  Remember a good investor trades based on a calculated risk not through emotion. Always ask yourself before placing a trade or making an investment: ‘what does the data say’?

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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