The State Of The U.S. Oil And Gas Industry Is Strong As 2017 Comes To A Close

Now that Christmas has come and gone, and my stomach somehow remains full from all the pecan pie and sweet potatoes I filled it with on Monday, it is time to take a look back at the events of 2017 and assess the status of the domestic oil and gas industry as the year comes to a close.  To paraphrase a standard line that every U.S. president uses in every annual state of the union message, the state of the industry as 2017 comes to a close is strong.

Yes, “strong” is a good word for it.  As in, surprisingly strong, unexpectedly strong, stronger than the industry had any right to realistically hope for as the year dawned 12 months ago.  Let’s look at some of the reasons why that is the case:

  • The OPEC/Russia Export Limitation Deal has been a rousing success –Yes, ok, I know this is supposed to be about the domestic industry, but the truth is that the current healthy state of the U.S. industry has been directly impacted by the success of this agreement.  Think back 13 months ago, when OPEC, Russia and the other non-OPEC nations announced this agreement:  What was their stated target price for international crude?  If you said “$65 per barrel,” you would be correct.  As I write this piece on December 26, the Brent price is trading at just above $66/bbl.  Others can quibble about the details of this deal, whether each individual country is cheating on its quota, all the other factors that go into determining the price for crude on any given day, but when your deal has, after 13 months, pretty much nailed its target outcome, that is unarguably a resounding success.
  • The WTI price is approaching $60/bbl –this measure is more directly relevant to U.S. crude production, and, after falling to ~$43 at mid-year, has risen about 38% from that low point.  A stronger crude price pretty much always improves the health of the oil and gas industry.  Much of this is due to the OPEC/Russia deal, but much of it is also because…
  • The U.S. industry responded to price fluctuations pretty much exactly as predicted a year ago – In my year-end predictions piece from a year ago, I projected that, in reaction to the comparatively high prices that existed at the end of 2016, the U.S. industry would “activate another ~ 200  drilling rigs during the first four months of 2017.”  U.S. producers actually activated almost 300 additional rigs during that 4-month period.  I further predicted that “[t]he likely result will be higher price volatility and a probable resulting fall-back to prices in the high- or even mid-40s.”  As mentioned above, the price actually dropped all the way to ~$43/bbl.  But, as expected, U.S. shale drillers then responded to that lower price by scaling back their drilling during the 2nd half of 2016, helping the price to rebound to its current, healthier level.  They will respond to this higher price by once again ramping up their drilling budgets for the first half of 2018, a factor that I will discuss in detail in my 2018 predictions piece next week.

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