Introduction…Oil prices drop below the floor at the $50 per barrel has caught some by surprise. The reason has been that the lower prices haven’t translated into lower production yet as was expected last fall.
Drilling Rig Count Dropping…We have 684 fewer drilling rigs operating in the U.S. on March 13th as compared to a year ago. The primary reason for the failure of production to decline is the average oil rig has become much more efficient, enabling drillers to produce more with less. That meant that the most inefficient rigs were taken off the market first. Also, exploration companies, especially ones with cash flow problems, kept up drilling to keep the money rolling in, even if they were selling oil for half of what they were last year.
Some Shale Production To Decline…The Eagle Ford in South Texas, the Niobrara in Colorado, and the Bakken in North Dakota are expected to see their combined production fall by 24,000 barrels per day in April. However, the offset is the Permian basin in West Texas is projected to see more than a 21,000 barrel-per-day increase in April, offsetting the declines elsewhere. This means that overall U.S. output probably won’t drop off quite yet.
In conclusion…Meanwhile, oil prices are in freefall once again, falling to fresh lows. WTI is flirting with the possibility of dipping below the $40-per-barrel level, which will bring worse panic to the sector. In a sign that the pain is mounting, Quicksilver Resources, a Texas-based oil and gas company, announced on March 17 that it has declared bankruptcy.
Until we see stability in oil pricing, it’s difficult to price new drilling programs. While we are waiting, we see other projects with significant cash flow available. Let me know what you interest level may be if any.
Sources: “Is US Oil Production Finally About To Fall?” OilPrice.com, Charles Kennedy, March 18, 2105