Email of the day on the US rig count
Comment of the Day

September 14 2015

Commentary by Eoin Treacy

Email of the day on the US rig count

The press has been touting the "sharp drop in rig counts" as evidence of an imminent slowdown in oil production, headlining off the drop of 18 rigs in the week ending 9/11. Now if we look at the facts, we are at 652 oil rigs versus 635 2 months ago. Last I checked, 652 is more than 635. Oil rigs dropped 10 in the past week. Gas rigs have been in a pretty clear, slow downtrend for most of this year.

Now of course a drop of 10 oil rigs in a week may sound like a lot to the untrained ear (which most journalists appear to have), but 10/662 = 1.51%, which is not exactly a blow-off-the-socks change. In fact, it is within the normal ebb and flow of wells being taken down to move to the next location, rigs offline for maintenance, etc.

I think the IEA's prediction of "slamming the brakes" on the production of shale oil (see ) needs to be taken with a somewhat wait-and-see attitude. Low prices will ultimately bring down high-cost production, but economists' predictions about oil production costs just might have included too much sunk cost and not factored in enough efficiency gains in the oil patch. This just could further reinforce the notion that oil prices will stay lower for longer than most in the financial media expect.

Eoin Treacy's view

Thank you for this informative email and chart contributed in the spirit of Empowerment Through Knowledge. Technological innovation is enhancing just about every area of our lives but its’ influence on the energy sector is particularly poignant.

Companies have invested hugely in developing new supply both in acquiring new sites and investing in the technology to develop them. Until a decade ago almost no one had experience of developing wells in nonporous shale reserves. The learning curve has been steep and conclusions evolve rapidly as more information becomes available.

The initial conclusion was that unconventional oil and gas would be a massive source of supply. The early decline rates forced some re-examination of economics and the rig count increased in line with the requirement for additional wells. More recently, the development of refracking technology has opened up the potential that decline rates can be reversed and for a lot less money than was initially invested in drilling. How successful refracking proves to be will have a strong influence on how much oil prices can rally over the coming years.  

Brent Crude bounced emphatically from the $42 area in late August and has been retracing that move over the last few weeks. It is coming down more slowly than it bounced but it will need to hold the August low if support building is to be given the benefit of the doubt.

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