Rigs and Spreads Sept. 1: An inflection point?

  • Rigs took a pause this week within the wider context of nine months of nearly continuous roll-offs.  In my last report from August 11, I noted that spreads at the time were too high at 262.  This number has plummeted to 244 in the intervening three weeks, with horizontal oil rigs easing back by just 7 over the same period.  As a result, rigs and spreads are now largely in balance, suggesting that the chronic erosion of DUC inventories may be ending.  With the breakeven to add rigs running around $76 WTI and the WTI currently holding a pricey $86, the prospects for a rebound in rig counts are improving.  We may be approaching the end of the mini-cycle begun last December.  Maybe.  We don't yet have enough data to call a trend, but it feels like we may be at an inflection point, or at least a mini-inflection point.

  • Rig counts

    • Total oil rig counts were flat at 512

    • Horizontal oil rig counts were flat at 463

    • The Permian horizontal oil rig count was down 2.

    • The Canadian horizontal oil rig count was again looking frail, down 25 from last year.  Whatever is going on in the US oil patch has now officially spread to Canada

  • The US horizontal oil rig count rose to -2.0 / week on a 4 wma basis.

    • This number has been negative for 39 of the last 40 weeks

  • Frac spreads fell, -2 to 244.  Spread numbers are back to the level of January 2022.  Not great.

  • DUC inventory came in at 17.9 weeks, the highest in more than a year

    • This recovery suggests a change of sentiment in the oil patch, that operators may decide to no longer pursue a policy of DUC inventory liquidations

    • On the other hand, this recovery has been driven by a collapse in the spread count, not as a result of a surfeit of rigs over spreads.  In any event, it feels like a change in the weather.  The coming weeks will tell us more.

  • In the August DPR (admittedly published two weeks ago), the EIA sees July crude and condensate production from key shale plays rising to 9.25 mbpd, up 6 kbpd from June

    • Permian production actually fell in July, down a marginal 1 kbpd over June, and in July was 11 kbpd lower than its March peak.  

    • The minor plays are up marginally over the period, supporting modest shale oil production growth in aggregate.  

    • The ‘peak shale’ thesis appears to be holding up.