Lately, the amount of drilling in the US (not including offshore Gulf of Mexico drilling) has been going up, and mainstream media is taking note. On Friday, a Bloomberg article had the following headline: ‘Oil Drillers Bring Back Rigs in Longest Streak Since 2014′.
In the article, the author states “US oil producers added rigs for the seventh week in a row, the longest period of expansion since the final days of the drilling boom in early 2014.” Adding, “prompted by an oil price recovery from a 12-year low in February, producers have begun returning parked rigs to service after idling more than 1,000 rigs since the start of last year. Prices peaked above $51 a barrel on June 8, and have declined about 13 percent since then to trade around $44.”
For oil bulls, taking the article’s main point at face value certainly would be cause for concern. But herein lies a misconception about the United States’ upstream oil business. What gets sorely missed in the oil price narrative is how quickly the plays most responsible for adding to overall production in the US deplete. The decline rate, a number that indicates how much of a pool of oil is brought to surface in a given period of time, never gets the attention it deserves. For instance, it is commonly thought that on average, the decline rate for continental US drilling sits at roughly 20%. But, according to a small but growing list of market analysts, 20% is far too low.
Michael Tran, Director of Commodity Strategy at RBC Capital Markets, thinks the correct decline rate is actually around 32%. Because of this widespread under-appreciation, Tran is largely ambivalent to the concerns shared by many an oil bull. “While the rising rig count in the US has struck fear in the minds of many, it is important to note that we need to continually add rigs through the balance of this year.”
“In other words,” he continues, “absent additional production, almost one-third of new production is subsequently lost every single year. US production growth is price-dependent and undoubtedly elastic.”
Therefore it appears that the increased rig counts in the United States is a result of producers looking to stem reserve declines rather than grow production incrementally.
As an aside, after reading the above, if you are someone who regularly follows the oil business in the popular press (and by popular, I am referring to Bloomberg, the Wall Street Journal and these sorts), naturally you may wonder why such misleading conclusions based on US government data about oil business fundamentals are conveyed throughout the media.
Here again, I return to Michael Tran, who has an interesting perspective on why such knee jerk reactions and conclusions are made.
“The US storage data is disseminated on the most rigorous and frequent schedule, and while the rest of the OECD can be patchy at times, both sets dwarf the lagged, incomplete, opaque, or non-existent nature of the data for the rest of the world. Many countries choose the path of least transparency when it comes to oil data reporting, but even the Emerging Markets countries that do disclose data often attract less attention or little media coverage.”
“Simply put, the market is quick to react to weekly US data releases while developments in other parts of the world can remain unearthed for months.”