Helping America Navigate a New Energy Reality

Why rigs deactivation doesn’t matter much?

By on 28 Mar 2016 in analysis, notable posts

(Econotimes) According to latest numbers from Baker Hughes, number of active oil rigs operating in United States has dropped to lowest levels since 2008/09 financial crisis. While back in October, 2014, the number of active rigs were at 1609 but as of last week it declined further by 15 rigs to 372, lowest since November, 2009.

In recent times, some market participants have taken note of the rig count to increase bullish bets on oil price recovery, suggesting drop in number of rigs indicating further declining in investments. However, our analysis suggests, when it comes to oil price recovery by changing fundamentals, other than intraday or few days boost, rigs count doesn’t matter much.

United States oil production is increasing becoming more efficient. Back in 2012, when about 1360 rigs were active on average, each rigs were producing about 1.74 million barrels per year. Efficiency improved through 2014 but not much to 2.08 million barrels/annum.

However, combining data from Baker Hughes and U.S. Energy Information Administration (EIA) shows, efficiency improved 350% since 2014 heading into 2016 and we expect it is likely to improve further, because historically speaking as producers focus on lesser number of rigs, both their cost and production from each well improves.

Back in 1999, only about 128 rigs, on an average were active throughout the year but each were producing about 16.77 million barrels of oil per annum. So still lots of scopes for improvements.

Shale technology, for good or bad have changed how oil markets operate, especially with their swing capability.

With such outlook, we don’t expect oil to recover much ground beyond $60/barrel in the medium term.

WTI is currently trading at $39.7/barrel, at 90 cents discount to Brent. © EconoTimes 2015. All rights reserved. The EconoTimes content received through this service is the intellectual property of EconoTimes or its third party suppliers. Republication or redistribution of content provided by EconoTimes is expressly prohibited without the prior written consent of EconoTimes, except for personal and non-commercial use. Neither EconoTimes nor its third party suppliers shall be liable for any errors, omissions or delays in content, […]

2 Comments

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  1. Conrad Maher says:

    The author appears to have related the total US oil production to the number of active rigs or maybe some other number is being used such as the Oil Initially In Place (OOIP) is being compared to rig count. Rig count matters for the health of the industry and with the rapid decline in production from ‘shale’ wells of around 60% in the first year of production, Red Queen or treadmill drilling is required to maintain or increase production. Red Queen drilling requires ever more good prospects to be drilled and the money to drill them. Of course there will be a lag from the steep decline in the rig count to a steep decline in shale production. I have calculated that lag to be about two years. Thus, we would expect to see sharper declines from ‘shale’ production in late 2016. However, I am inclined to get these things wrong, so the decline could be longer in coming. The drilling of new wells with debt financing will have largely dried up after the banks have taken their write offs and the rig count will not pick up quickly. That will benefit the low cost producers in the Middle East.

    • aspo-usa says:

      Thank you for your comment Conrad. We do not scrutinize every post we share but we selected this article because it provided a perspective and data on what is often a poorly understood issue. We do not determine a priori whether the author’s conclusions hold water and are supported by their own or other evidence. As always, our inclusion of any given post does not constitute an endorsement.

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