Rigs and Spreads June 23: Something bad this way comes

  • Rig counts fell this week, as has become customary

    • Total oil rig counts declined, -6 to 556

    • Horizontal oil rig counts fell, -2 to 496

    • The Permian horizontal oil rig count was down, -2

    • The rig count has fallen by 76 (13%) since its November peak and stands at the level of April 2022

  • The horizontal oil rig count fell at a pace of -5.25 / week on a 4 wma basis.  

    • This number has been negative for 28 of the last 29 weeks

  • Frac spreads rose, +9 to 277, up 21 in just the last three weeks

  • The EIA published the June DPR this past week.  Highlights:

    • In the June DPR report, crude and condensate production from key shale plays rose to 9.14 mbpd, up 48 kbpd from April

    • Permian production was up 9 kbpd in May.  Permian production growth has averaged 24 kbpd / month over the last three months

    • The EIA revised up production from key shale plays going back to November 2021, with revisions averaging a hefty 85 kbpd since the start of the year.

    • Compared to last year, total shale oil production is up 0.7 mbpd, of which the Permian contributed  0.5 mbpd. On paper, this is still decent growth at the annual horizon

  • Not all is happy, however

    • Permian oil production is effectively unchanged in the last four months

    • Shale oil production gains from the last two months have come from the minor plays.  Of these, only the Anadarko is showing secular growth.  The rest – the Niobrara, the Bakken and the Eagle Ford – are just revisiting production levels of late last year.  

    • Declining rig counts and rising spreads are an unsustainable combination at current levels.  This will lead to an accelerating erosion of DUC inventories, which have continued to fall almost without exception for the last three years.

      • Rebalancing the rig / spread ratio to hold DUC inventories constant would require either 62 additional horizontal rigs or a reduction in the spread count by 31.  Given that rigs have been in secular decline for the last half year and given that the breakeven to add rigs appears to require $80 / barrel WTI, it is hard to see a robust rig count recovery at current WTI oil prices below $70 / barrel.  

      • The other alternative is a decline in spread counts, probably accompanied by a continued roll off in DUC inventories.  

    • None of this bodes well for the future of US shale production.

Rigs and Spreads June 23.pdf