According to Goldman Sach’s February 16th Weekly Rig Monitor, another 84 oil rigs were idled in the U.S. the prior week, continuing the ongoing trend toward reducing crude production. However, even the substantial and ongoing reduction in rig counts is not likely to make much of a difference over the short term, given the current weak global demand and improved productivity from many U.S. oil wells due to new technology.
GS analysts Damien Courvalin and Raquel Ohana describe the dynamic at play here. “The decline in the US oil rig count continued last week with 84 rigs down, comprising 52 horizontal rigs, 18 vertical rigs and 14 directional rigs. Like the prior week, the Permian basin oil posted another significant decline in horizontal rigs, with large cuts in the counties with the highest well productivity. While the momentum in the US rig count cuts suggests that the US rebalancing is on track, recent comments by E&Ps suggest that these indiscriminant rig cuts reflect an initial focus on cost cutting rather than asset optimization (high grading), providing limited information on the future path of the rig count.”
US rig count down, but more rig shut downs needed to rebalance market
Courvalin and Ohana set up a model of the current US horizontal rig count, and their model suggests that U.S. oil production growth from these four major shale plays alone will reach 600 kb/d yoy by the end of 2015, assuming continued productivity gains at both the well and rig level.
The GS analysts note that the current rig count decline, while substantial, is still not sufficient to slow down production growth enough to effectively rebalance the oil market. They argue the built-in flexibility to cut non-contracted rigs and the associated cost deflation together with the producer hedging seen over the last weeks (as well as the recent wave of issuing new shares to raise capital) significantly increases the risk that the U.S. production slowdown will happen incrementally. The analysts reiterate their opinion that crude oil prices must stay down over the next couple of quarters for the announced capex guidance and impending rig reduction to actually lower production growth.