Investigating the Nexus Between Nigerian Rig Rates and Crude Oil Prices

Abstract

This study set out to investigate how Nigerian oil rig rates respond to oil price fluctuations, and the lag between them aimed at developing models for forecasting land, swamp and offshore rigs rates in Nigeria. The research methodology involves application of Ordinary Least Squares regression to develop models that can predict land, swamp and offshore rig rates, which can be used in the Nigerian market. Firstly, Brent crude oil prices are exogenous to Nigeria, whilst land, swamp or offshore rig rates are endogenous. Furthermore, these exogenous variables are regressed with and without lag to test the response time between the cause and its effect. A striking relationship is observed between these independent variables similar to global trends. Like other countries, the Nigeria oilrigs count trends along with Brent crude oil price. However, a 3-4 months lag exists between Nigerian rig rates and oil prices. Furthermore, the model estimation using one-year lag seems to show more accuracy in matching the historical rig rates and the more expensive the rig, the wider the margin caused by oil price changes. This confirms the possibility to predict Nigeria rig rates and perhaps, well costs from oil price forecast.

The Asymmetric Relationship between Conventional/Shale Rig Counts and WTI Oil Prices

“…Iliescu (2018) finds that WTI oil prices and rig counts are cointegrated and identifies a bidirectional causality ordering. Ojukwu et al (2020) consider the relationship between rig counts and Brent prices in Nigeria, showing a 3-4 month delay between Nigerian rig counts and oil prices. Espinasa et al (2017) study the supply and demand drivers of oil prices in several countries, exploring the relationships between oil prices, rig count, oil production and world economic activity.…”