US oil rigs rise along with expectations of a year-end slowdown

New York (Platts)--17 Aug 2015 839 am EDT/1239 GMT

The US oil rig count rose again last week, up two to 672, and continued a trend that began at the end of May when the count hit a 2015 low of 628, according to Baker Hughes.

The trend was not expected to last, however, as analysts expected E&P companies to begin tapering drilling towards the end of the year as their capex budgets run out and they wring more production from fewer rigs.

This assumes oil prices do not stage a significant rebound by in the final quarters of the year.

"We believe E&P companies spent over 60% of their capital budgets in the first half, and as a result, we wouldn't be too surprised if activity drops sharply as the holiday season begins," said Evercore ISI Senior Managing Director and Partner James West in a Friday report.

"For the fourth quarter we believe the current oil price level will cause a sharp year-end activity drop off (50-100 rig) as many E&P companies run out of capital," West added.

NYMEX September crude settled 27 cents higher at $42.50/b on Friday.

The decrease in rigs was unlikely to see a turnaround in 2016 due to greater efficiencies in production and lower capital spending programs.

Producers have already achieved such efficiencies in drilling that their costs are down 20%-30% so far this year and producers are targeting even more next year, Barclays Equity Research said in a report earlier in the week.

Barclays said it was "now forecasting large cap E&P 2016 spending down 11%, which is based on $65/b oil prices for 2016.

But if strip prices were closer to $50/bbl over the next several months, North American upstream spending would be down more than 30%."

In terms of efficiency, the US EIA said in its August 10 "Drilling Productivity Report" that oil well production per rig would continue to grow next month.

Texas' Eagle Ford Shale production is forecast to increase from August to September by 26 b/d to 792 b/d per new well, with the Utica and Niobrara regions slated to increase 10 b/d to 281 b/d and 15 b/d to 561 b/d per new well.

The Bakken, Permian and Marcellus were forecast to have a more modest increases in drilling productivity.

Not surprisingly the greater productivity in the Eagle Ford was where the most rigs were added this week in the US oil patch -- rigs rose by five this week to total 84, Baker Hughes said.

It remained to be seen how much more efficient drillers could become and and if lower capital spending would curb production, but the EIA this week forecasted a fall in US crude production to average 9.0 million b/d in 2016, down from an average 9.4 million b/d in 2015, according to its Short-Term Energy Outlook release August 11.

Having said that, North Dakota's Department of Mineral Resources reported Friday that it expects crude oil production to be flat for the next two years at about 1.2 million b/d.

If drilling productivity can continue to improve across other major US producing areas, and output can be maintained as in the Bakken, the EIA's forecast of a drop in 2016 production may be in need of revision.

--Benjamin Morse, benjamin.morse@platts.com
--Edited by Richard Rubin, richard.rubin@platts.com

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