The U.S. tight oil rig count about 25% of what is needed to maintain 2019 levels of tight and total oil production. As U.S. supply plunges, the over-supply paradigm of the last 5 years may finally change.
The U.S. tight oil rig count is now 155 (Figure 1). About 600 rigs are needed to maintain tight oil production at 7 mmb/d and U.S. total output at 12 mmb/d. That means that tight oil will irreversibly fall to less than 5 mmb/d and U.S. to less than 8 mmb/d by mid-2021.
Figure 1. June tight oil rig count was 155, 25% of 600 rigs needed to maintain 7 mmb/d tight oil/12 … [+]
This is irreversible because of the empirical lag between adding a rig and first production is about one year. That’s the downside of pad drilling. Every well must be drilled before a frack crew can begin its work. If there are 10 wells on a pad and each well takes 30 days to drill, 10 months have passed before fracking begins. Assuming it takes about a week to frack each well, that adds another month. Nothing ever goes according to plan for either drilling or fracking so it’s easy to see how a year is a reasonable lag.
The good news is that the decline in U.S. tight oil rig count appears to be slowing. The weekly change in tight oil horizontal rig count reached a low of -62 rigs the week ending April 17 (Figure 2). A week later, the WTI weekly average price reached its bottom at $3.32 following negative pricing on April 20.
Figure 2. Tight oil rig count weekly change and WTI spot price are stabilizing. Rig count change … [+]
WTI spot prices are following a similar trajectory. That’s not good news for producers because it implies that WTI is converging on a stable level of about $40 to $45 per barrel.
It is impossible to predict when rig count might begin increasing again but empirically, there is a negative correlation between tight oil rig count & WTI crude + comparative inventory (Figure 3).
Tight oil horizontal rig count fell -392 (73%) from March 13 to June 26 while C.I. increased 10-fold from -15 to 140 mmb. Outside capital was available after the 2014-2016 oil-price collapse that may not be available this time. At the very least, rig count won’t begin to reverse until U.S. storage begins to decline and that has not happened yet.
Figure 3. Negative correlation between tight oil rig count & WTI crude + comparative inventory. … [+]
The implications of plunging U.S. rig counts are enormous not only for U.S. but also for world oil supply.
Tight oil has accounted for all of global growth since 2010 (Figure 4). World production fell almost 5 mmb/d from November 2018 and March 2020 before the added effect of the world economic closure because of Covid-19.
Figure 4. U.S. tight oil production accounts for all world supply growth since 2008. Incremental … [+]
Once world demand recovers, the loss of U.S. supply growth at least through 2021 may potentially change the over-supply paradigm that has dominated world oil prices since June 2014.
——————————————-
There is more detail at art berman.com
