The Oil And Gas Situation – New Price, Production, Policy, Pipeline Targets Arise

Some thoughts on the domestic oil and gas situation as we move into May…

More rigs, more jobs, more drilling, but for how much longer…:  As I pointed out at the beginning of April, the U.S. oil and gas industry added more than 200 new active drilling rigs during the first quarter of 2017.  The pace of new rig activation slowed somewhat during April, but the count continued to rise as a total of 46 new rigs came online during the month.  The current U.S. domestic rig count of 870 is more than double the count of 420 at the end of April, 2016.

It will be interesting to see how much longer this upwards trend in the rig count will continue, given the softening oil price.  The corporate upstream companies have now implemented their capital plans for the first half of 2017, and are beginning the process of evaluating how those plans should be adjusted for the second half of the year.  The rising drilling activity and increasing demand for service companies and their products has predictably resulted in corresponding increases in service costs.  One would expect that, combined with a sub-$50 oil price, to result in a leveling off and possibly even a falling rig count for the last two quarters of the year.

But so much of that depends what OPEC does.: Will OPEC extend its current agreement to curtail production, which expires on June 30, or won’t they?  The answer to this question, more than any other single factor, will determine where the price of crude goes, and thus where the U.S. rig count and drilling budgets go for the second half of 2017.

 The 2017 capital budgets for the majors and the large independent producers who drill the great majority of wells in the U.S. were put into place in anticipation of a crude price at or above $50/bbl.  But the price for West Texas Intermediate (WTI) has recently fallen below that level due in large part to uncertainty about where OPEC will head beginning July 1.

 

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