The relationship between oil prices and rig counts: The importance of lags

Abstract

This study deals with a timely and relevant issue in the oil market in the wake of the recent drastic drop in oil prices, which is the relationship between changes in oil prices and changes in rig counts, while accounting for other determinants of this relationship. This relationship is of strong interest to analysts, investors and policymakers in the United States and other countries. We empirically verify the impact of changes in oil prices on rig counts, which has lags up to one quarter. This evidence is stable across time and over different linear and non-linear models. The analysis also suggests that the relationship is non-linear, which is verified by both the quantile regression and quantile-on-quantile models. We find evidence of non-linearity that has softened in the most recent years where the relationship between the variables has stabilized.