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Will Rig Falls Reverse Soon If U.S. Crude Stays Above $50?

By Investing.com (Barani Krishnan)CommoditiesJan 22, 2019 03:20AM ET
www.investing.com/analysis/will-rig-falls-reverse-soon-if-us-crude-stays-above-50-200377811
Will Rig Falls Reverse Soon If U.S. Crude Stays Above $50?
By Investing.com (Barani Krishnan)   |  Jan 22, 2019 03:20AM ET
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Is shale production slowing? It’s a question worth asking as the U.S. rig count fell the most in nearly three years last week, and a fourth-quarter survey showed dramatic drops in oilfield equipment use and employment in Texas, southern New Mexico and North Louisiana.

Still, with U.S. crude futures trading near $55 per barrel—and projected to reach $60 and above in the near-term—there may be more incentives for domestic oil drillers to keep the spigots open, adding to OPEC’s challenges as the oil-producing cartel tries to drain an oversupplied global market.

Last week’s drop of 21 U.S. oil rigs cited by industry firm Baker Hughes justifiably jolted crude traders, accelerating gains in a market already trading in a heightened bullish mode from OPEC efforts to raise the visibility of its output cuts. The weekly rig drop was the sharpest since February 2016. Even so, what’s left—852 oil rigs—is still higher than the 747 level seen a year ago.

Lagging Indicator

The golden rule to the oil rig count is that it’s a lagging indicator. Price changes typically lead variations in the number of rigs employed, with an average lag of between 16 and 22 weeks.

Drilling activity and futures of U.S. West Texas Intermediate are closely correlated and each exhibits a pronounced cycle.

WTI/U.S. Drilling Correlation Chart
WTI/U.S. Drilling Correlation Chart

Correlation data mined by Reuters shows that in 2014 WTI futures turned lower in the middle of June and the rig count started to fall 16 weeks later, in mid-October.

In 2016, WTI turned higher from the middle of January and the rig count began to recover 19 weeks later, from the end of May.

While each shale patch has different operating efficiencies, and there’s talk that some drillers can break even with oil as low as $30 per barrel, pricing at around $40 is generally deemed the point at which drillers may consider slowing production to await better prices.

Prices Have To Drop For Rig Declines To Trend

The current slide in the rig count comes just four weeks after WTI fell under $50 per barrel on December 17. In order for rig declines to trend, prices have to stay lower.

WTI 300-Min Chart
WTI 300-Min Chart

Since bottoming at around $42 on Christmas Eve, U.S. crude has, however, traded above $50 over the past two weeks and looks set to sustain its upward momentum toward $60.

And production is expected to grow by one million barrels this year, to reach 13 million barrels per day in 2020.

The question, therefore, is: when shale activity picks up, will U.S. drillers be able to neuter again the 1.2 million barrels or more that OPEC will be cutting in a day?

New York-based Energy Intelligence says it will be difficult to answer that question with certainty, even though firms such as Diamondback (NASDAQ:FANG), Parsley Energy (NYSE:PE) and Centennial Resource Development (NASDAQ:CDEV)—all established players in the flagship Permian shale basin—announced cuts to their 2019 capex last month.

Many Allowed Drilling Budgets To Rise Last Year

The consultancy said:

“The true test will come this year, should U.S. oil prices remain close to their current $50 level. Although publicly-traded U.S. producers routinely shelled out big sums to buy back shares rather than plow every extra dollar into higher growth, many still allowed their budgets to creep up during the year, and used the run-up in oil prices in the back half of 2018 to cover the difference.”

Asset sales could also bring cash boosts for shale companies beyond the sale of oil, allowing them to commit to spending even if oil prices don’t rise, Energy Intelligence said. The agency cited JP Morgan data showing some companies have hedged just 19 percent of their 2019 oil volumes—about 50 percent less than average. It added:

“Permian players like Halcon Resources (NYSE:HK) and Concho Resources (NYSE:CXO) have brought in millions in the past year from the sale of infrastructure to dispose of produced water, and others hold meaningful midstream assets that could rake in extra cash.”

Dallas Fed Warns Of Shale Slowdown; Goldman Says Not At Least From M&As

In a fourth-quarter survey of the Eleventh District covering Texas, southern New Mexico and North Louisiana, the Dallas Federal Reserve said the index for utilization of equipment by oilfield services firms dropped to just 1.6 points from 43 points in the fourth quarter, indicating virtually no growth at all.

The employment index in the survey, meanwhile, fell from a previous 31.7 points to 17.5, after a “moderating in both employment and work hours growth” that again suggested a slowing in shale activity, the Dallas Fed said.

But Goldman Sachs said discussions at its recent Global Energy Conference Overall showed there was “little confidence—from both investors and companies—that 2019 would be a year in which … corporate M&A would meaningfully reduce shale production in the medium term."

Will Rig Falls Reverse Soon If U.S. Crude Stays Above $50?
 

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Will Rig Falls Reverse Soon If U.S. Crude Stays Above $50?

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Comments (3)
lee owens
lee owens Jan 23, 2019 8:18PM ET
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price will go up it will get better and hello hope every one doing well
Brad Smith
Brad Smith Jan 22, 2019 8:50PM ET
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Even with Shale companies operating on lower costs than the rest of the industry, they'll likely slow down operations as profitability decreases as we've seen historically. The current oil price level has been and continue to be pressured by the supply side of the market.
follow trade
follow trade Jan 22, 2019 8:18AM ET
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u seems to be dovish quite soon in this article compare to what u said yesterday .( price driven analysis)
Barani Krishnan
Barani Krishnan Jan 22, 2019 8:18AM ET
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Thanks for the feedback.Each piece of data brings its own dynamics and the story needs to be told accordingly.Notwithstanding today's early declines, the path of least resistance is now higher than lower. But as you are probably aware, shale is a powerful, dark horse in this market that can upend any bullish trend.
follow trade
follow trade Jan 22, 2019 8:18AM ET
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Barani Krishnan   there are always two side of story, which is more brighter that one  can always guess , btw thx for showing us the story.
Barani Krishnan
Barani Krishnan Jan 22, 2019 8:18AM ET
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Andrew Clift  , nothing makes me happier than to be able to interact with my readers to explain how I arrived at a certain prognosis and see if they agree. And if I'm being appreciated for that, then that's double jolly! :). . Thanks as well for reading and following us.
 
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