The recovery in the US shale oil industry, a major factor that has kept global crude prices relatively steady at around $50 a barrel this year, looks like it may run its course.
According to Vivek Dhar, mining and energy analyst at the Commonwealth Bank, after increasing for 23 consecutive weeks in the first half of 2017, the number of oil rigs deployed in the US fell again last week, hinting that the tailwinds created by lower production costs and higher prices over the past 18 months may be starting to ebb.
“The stabilisation in US oil rigs likely indicates that costs to accelerate production are broadly in line with prices,” he said in a note released on Monday. “That follows a period of significant cost reduction due to lower servicing costs and advances in technology.”
This chart from the Commonwealth Bank overlays the number of oil rigs deployed in the US, based on data from energy services firm Baker Hughes, against changes in US oil production over the past 16 years.
After jumping more than 140% from the recent cyclical trough in May 2016, the rebound in US rigs deployed has stalled over the past couple of months, coinciding with a decline in global crude prices from the levels seen earlier in the year.
“A tightness in the oil services labour market has also provided a headwind to US shale attempts to further cut costs and boost production,” Dhar says.
However, while the recent stall in rigs deployed points to a slowdown in US production growth over the longer-term, Dhar says that US output is still likely to hit record highs in the year ahead.
“We estimate that it currently takes around 5-6 months from rig deployment to oil production,” he says.
“US oil production is now down only around 80 thousand barrels per day (kb/d) from peaks reached in June 2015 and is expected to rise by around 400kb/d by the end of 2018.”
And, even with the slowdown in the number of rigs deployed, Dhar notes there’s no shortage of additional supply ready to go should crude prices start to inch higher.
“The US Energy Information Administration (EIA) reported that drilled-but-uncompleted (DUC) wells have increased to a multi-high of 7,059 at the end of July. These DUC wells just require fracking to bring oil to the market. And since these wells require less labour to bring online, they are a source of lowcost production,” he says.
“If oil rig drilling proves uneconomical, we could see companies look to draw down on their DUC wells, keeping US oil output higher for longer.”