Rigs and Spreads July 7: Rolling off

Last time, I wrote

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.  

We see just this development this week: another fall in rig counts and an even larger pro rata decline in the number of spreads.

*****

  • Rig counts

    • Total oil rig counts declined, -5 to 540

    • Horizontal oil rig counts fell, -6 to 489

    • The Permian horizontal oil rig count was down, -5

    • The rig count has fallen by 83 (15%) since its November peak, and stands at the level of April 2022

  • The horizontal oil rig count fell at a pace of -3.25 / week on a 4 wma basis.

    • This number has been negative for 30 of the last 31 weeks

  • Frac spreads fell, -12 to 260.  This is not the recent low, but pretty close

  • Where does all this turn around?

    • We are seeing a cyclical type of downturn in the rig count, the sort normally associated with recessions or over-production and resulting soft oil prices

    • But that’s not the story today.  US crude oil inventories are normal, the economy continues to expand at a reasonable pace, and oil prices are not particularly soft at nearly $74 / barrel WTI

    • How much do prices have to rise to stimulate a revival in drilling?  Or does that occur at any price?  

    • Is the reality that operators have simply drilled through their best inventory, that shales are a kind of one-trick pony, a comparative flash in the pan?  

    • This seems to be the case.  It is hard to avoid the impression that some kind of implosion is coming, a substantially more severe collapse of US shale oil production than is currently anticipated for the back half of this decade.

Rigs and Spread July 7.pdf