If a drilling rig gets stacked in the middle of Texas, and no one's there to hear it, does it make a sound?

It's been two months since I last peeked at Patterson-UTI's (NASDAQ:PTEN) incredible, shrinking rig count. Here's the updated data with the past two months' reported numbers:

Month

Rigs Operating

Sequential Monthly Change %

Oct. 2008

283

N/A

Nov. 2008

261

(7.8)

Dec. 2008

213

(18.4)

Jan. 2009

162

(23.9)

Feb. 2009

128

(21.0)

March 2009

92

(28.1)

April 2009

69

(25.0)

May 2009

60

(13.0)

Data from company press releases.

This is starting to look like the endgame, Fools. After a gnarly April, Patterson's May rig count decline decelerated significantly. In absolute terms (i.e. the number of rigs, rather than the percentage), this was easily the smallest sequential drawdown since the carnage began last fall. Of course, there just aren't many marginal rigs left running at this point.

It looks like Mr. Market wasn't being too crazy in bidding up these stocks back in March. As I pointed out in February, Patterson in particular was practically being given away. That said, I'm concerned that the rebound in oil services stocks, and energy stocks more broadly, is a bit overdone at this point.

Since my last update, Parker Drilling is up about 150% and Precision Drilling Trust (NYSE:PDS) has roughly doubled. The trend extends across the oil services spectrum, as demonstrated by the performance of the Oil Service HOLDRs (AMEX:OIH), an exchange-traded fund that includes everyone from Schlumberger (NYSE:SLB) to Transocean (NYSE:RIG). That vehicle is trading hands more than 40% higher, and that's excluding March's massive rally.

Oil's flimsy fundamentals
No longer being deeply oversold by investors, I have to assume that the oil services group is now largely trading up on the improving price of crude, which has risen more than 60% from its February nadir of around $42 per barrel. (I'm ignoring the exaggerated effect of the January futures contract expiration.) This is exactly why I'm nervous about these stocks today.

Rex Tillerson, chief executive of ExxonMobil (NYSE:XOM), said fundamentals didn't justify $70 oil in September 2007. After the demand destruction that's followed, he obviously doesn't think much of this latest rally in crude, calling it "just a bet" on the part of traders. 

Daniel Yergin, author of The Prize and chairman of IHS Cambridge Energy Research Associates (CERA), is in pretty much the same boat, pointing to a 3 million-barrel-per-day drop in demand to pre-2005 levels. He attributes oil's performance more to the stock market rally and the falling dollar.

If Yergin is correct on this point, and I believe he is, then there are two reasons to be concerned.

Perhaps the more obvious point is that equity market strength and dollar weakness have to continue in order for today's stronger oil price to persist. It's not too hard to get behind dollar weakness, given the United States' increasingly scary balance sheet. As for the market rally, you know where I stand. Unless you believe we're headed straight for a V-shaped recovery, with a return to "business as usual" sometime in 2010, it seems implausible that the market indices have got nothing but blue sky ahead.

Signal to noise
My greater concern, though, is that the seemingly high correlation of today's oil price to nonfundamental factors erodes information content. Prices are a signal. I'm worried that we're mostly receiving noise at this point.

Granted, if oil goes up because stocks go up, or because the dollar goes down, it's not a baseless move. The stock market is supposed to anticipate economic strength, which should correlate to stronger oil demand. A weaker dollar should push up the price of our oil imports.

These correlations have always existed, but they aren't one to one. If they were, commodities would offer no portfolio diversification benefits, and wouldn't be treated as an asset class by institutional money managers. This exact treatment of commodities such as oil as a portfolio investment may be partially responsible for the tightening correlations I believe we're seeing with other risk assets, but that's a story for another day.

Bottom line, if the oil price contains less information than is generally supposed, that's going to usher in poorer capital allocation decisions by oil patch operators, on the margin. While an ExxonMobil or a Chevron (NYSE:CVX) isn't sweating the volatility, and is more or less sticking to its spending plan, smaller players are taking today's prices as a prompt to emerge from their bunkers and put some rigs to work. 

If the all-clear signal proves false, that could leave some companies seriously shell-shocked. War is hell, and so is capital budgeting in the oil patch today. Stick with the nimblest, Fools. We're not out of the woods yet.

Precision Drilling Trust is a Motley Fool Global Gains selection. Drill into any of our Foolish newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.