Oil Rigs in Retreat: A Strategic Shift from Chemicals to Airlines

The U.S. Baker Hughes Oil Rig Count, a barometer of energy sector health, has entered a new phase of contraction. As of December 2025, the count stands at 546 rigs, a 43-unit decline from the same period in 2024. This marks a continuation of a long-term trend: since the 2014 peak of 1,609 rigs, the industry has shed over 60% of its activity. While short-term fluctuations—such as the recent 3-rig increase in oil drilling—suggest cyclical resilience, the broader narrative is one of structural decline.

This shift has profound implications for investors. Historical data from 2010 to 2025 reveals a stark divergence between two sectors: the Chemical Products industry and the Passenger Airlines sector. As oil rig counts fall, these sectors move in opposite directions, creating a compelling case for strategic asset allocation.

The Chemical Products Industry: Squeezed by Margins and Regulation

When oil prices and rig counts decline, chemical producers face a double whammy. Lower crude prices reduce feedstock costs, but the benefits are often offset by volatile margins and regulatory headwinds. For example, in December 2025, European chemical firms like BASF and Solvay faced a 16% cost disadvantage compared to U.S. peers due to elevated naphtha prices. Meanwhile, the EU's Carbon Border Adjustment Mechanism (CBAM) forced companies to divert capital from innovation to compliance, exacerbating financial strain.

Historical backtesting underscores this vulnerability. During the 2020 oil price crash, the S&P 500 Chemicals Index fell 32% in six months, lagging behind the S&P 500's 15% decline. Similarly, in 2025, as WTI crude dropped to $57.46 per barrel, U.S. chemical giants like Dow Inc. (DOW) and LyondellBasell (LYB) saw earnings erode despite lower feedstock costs. The sector's reliance on energy-intensive processes and its exposure to global regulatory frameworks make it a weak performer in a low-oil-price environment.

Passenger Airlines: Winners in a Low-Cost Fuel World

Conversely, the Passenger Airlines sector thrives when oil prices fall. In December 2025, as rig counts dropped 13.57% year-on-year, jet fuel prices plummeted to $2 per gallon—a 20% decline from earlier in the year. Airlines such as Delta Air Lines (DAL) and American Airlines (AAL) capitalized on this, reporting operating margins of 15.6% in Latin America and 6.2% in Asia-Pacific. Lower fuel costs, which typically account for 20–30% of airline expenses, directly boost profitability and stock performance.

This pattern has repeated historically. During the 2020 oil slump, the S&P Global Aerospace & Defense Index (which includes airlines) gained 18% in six months, outperforming the S&P 500. In 2025, the sector's gains were even more pronounced, with DAL and AAL shares rising 22% and 19%, respectively, as fuel costs fell. The sector's sensitivity to oil prices makes it a natural beneficiary of declining rig counts.

Strategic Allocation: Underweight Chemicals, Overweight Airlines

Given these dynamics, investors should consider underweighting the Chemical Products industry and overweighting the Passenger Airlines sector. The rationale is twofold:

1. Structural Headwinds for Chemicals: The energy transition and regulatory pressures are likely to persist. The EU's CBAM, fragmented sustainability standards, and rising energy costs in Europe will continue to weigh on chemical producers. Additionally, the sector's capital-intensive nature makes it ill-suited for a low-growth, low-oil-price environment.

2. Cyclical Tailwinds for Airlines: With the U.S. rig count projected to remain below its long-term average (499.09) through 2027, oil prices are unlikely to rebound to pre-2024 levels. This creates a favorable backdrop for airlines, which can lock in low fuel costs and reinvest savings into fleet modernization or shareholder returns.

Looking Ahead: Rig Counts and Market Implications

The Baker Hughes data suggests rig counts will stabilize at 410 by the end of 2026, with a gradual rise to 440 in 2027. While this hints at a modest recovery in drilling activity, it remains far below the 2014 peak. For now, the energy sector is in a phase of consolidation, and the sectors most exposed to this shift—chemicals and airlines—will diverge in performance.

Investors should position portfolios to reflect this reality. Underweighting chemical stocks and increasing exposure to airlines offers a hedge against prolonged low-oil-price conditions while capitalizing on the latter's margin expansion. As the energy transition accelerates, sector rotation will become increasingly critical—a strategy that aligns with both historical trends and forward-looking projections.