As of this writing on August 15, the DrillingInfo Daily Rig Count has now dropped by 201 rigs since its most recent peak last November 8. That’s a 17% decline, something the industry hasn’t experienced in so few months since 2015.
The question now becomes whether or not oil and gas producers need to idle even more rigs going forward in order to help keep prices propped up at semi-healthy levels. One of the industry’s most prominent and vocal CEOs – Harold Hamm of
Speaking at the Enercom Oil and Gas Conference in Denver on Tuesday, Hamm told the audience that domestic producers “need to row our own boat,” he said. “We need to make sure we don’t oversupply the market.” Hamm noted that investor pressure on corporate producers to exercise more capital discipline had been one of the drivers behind this year’s drilling slowdown, and said that that trend needs to continue:
“Capital discipline is more important now than at any time I’ve seen it,” he was quoted by Reuters as saying. “We can oversupply the market, and we have,” he said, referring to the prominent role U.S. shale producers now play in overall global crude supply.
Hamm predicted that the idling of rigs would continue throughout the remainder of 2019, saying “we’re heading for 800” onshore rigs, referring to the weekly rig count conducted by
Hamm’s remarks came as domestic producers struggle to deal with increased volatility and uncertainty in the crude price market, caused in large part by the ongoing trade conflict between the United States and China, and resultant apparent slowing of China’s economy. These and other bearish economic factors have led both the U.S. Energy Information Administration (EIA) and the U.N. International Energy Agency (IEA) to issue downward revisions in their demand forecasts for the remainder of 2019.
The IEA, in its latest Oil Market Report, also revised its crude market supply/demand projection for 2020 to a net surplus of .5 million barrels of oil per day. The agency had previously projected a .5 million supply deficit for 2020.
Thus, producers can expect ongoing volatility in the markets going forward. Such volatility makes the challenge of planning a company’s capital budgets and business beyond a few months that much more difficult. It also makes it harder for companies with active hedging programs (a practice Hamm himself has always slammed and avoided) to find counter-parties willing to enter into contracts at attractive longer-term prices.
The result of all of these factors and market unpredictability is likely to be that Hamm will get his wish: We will almost certainly see the U.S. rig count continue to decline, at least for the remainder of 2019. Whether enough rigs will be idled to create a corresponding slowing of domestic supply growth that is significant enough to begin to stabilize international markets seems far less likely. Despite the idling of those 201 rigs over the last 10 months, U.S. overall production levels have continued to grow at such a pace that the industry appears likely to increase supply by about 1 million barrels of oil per day during 2019.
The EIA continues to project that U.S. production will grow at a healthy pace in the coming few years as well. But those projections assume crude prices will remain at or higher than current levels. Harold Hamm just sounded a warning of his skepticism about the accuracy of those assumptions.
Will the rest of the industry listen?