Permian Panic Continues As Rig Counts Rise Amid Record Glut In Crude

Tyler Durden's picture

With a record glut of crude and gasoline, US crude production pushed to new cycle highs this week and continues to track lagged rig counts.

US crude inventories are at a new record high...

 

And so are Gasoline inventories...

 

And the rig ccount keeps rising with lagged oil prices...

  • *U.S. OIL RIG COUNT UP 6 TO 597 , BAKER HUGHES SAYS      :BHI US

Highest since October 2015

 

Production keeps rising, and has a long way to go to catch up to the lagged rig count...

 

And the oil algo idiocy from DOE data has been erased with RBOB back below $1.50...

 

The surge in rigs has been driven almost 100% in the Permian, but as OilPrice.com's Nick Cunningham asks, how much longer that the Permian craze continue?

The two great dueling forces in the world oil market, OPEC and American production, have created an atmosphere of uncertainty, as prices hover above $50. Last week the EIA reported another record inventory and an increasing rig count, while analysts point to a possible crisis as a market held aloft by buoyant predictions of OPEC cuts slowly faces up to insufficient demand.

Crucial to this situation is the state of the U.S. patch, particularly the Permian Basin, which since late last year has been the focus of recovering production. The EIA data for the field is good, with new well production rising sharply and overall production of oil and gas rising sharply in 2017. While some speculate the bubble may burst, prospects for companies already invested in the Permian look positive, even if production costs are rising.

The Permian has seen the highest increase in rig count of any U.S. basin. Six of the twelve rigs added last week went up in the Permian, and its total now stands at 301 rigs, up from 172 a year ago, out of a total U.S. count of 741. In total the count is up 83 percent from May 2016, though it has yet to reach the booming numbers of 2013, when over two thousand rigs were in operation. Even 2015, as the U.S. sector was being squeezed by low prices, saw the total count hovering near two-thousand, according to Baker Hughes.

The increase is coming hot on the heels of the OPEC production deal, and seems to be in direct correlation with the OPEC announcement of nearly 900,000 bpd in cut production this month. For now, markets are happy, but underlying fundamentals remain as they were: cut production in Saudi Arabia and elsewhere will be made up by a resurgent American sector.

Last month, ExxonMobil paid $6.6 billion in order to double its exposure in the Permian, the single largest domestic U.S. oil deal since the price collapse in 2014, according to Forbes. Noble Energy announced in January 2017 it was acquiring Clayton Williams Energy for $2.7 billion, adding seventy-one thousand acres to its holdings in the Permian, specifically in the Southern Delaware Basin. 

Austin-based Parsley Energy has been acquiring more acreage, amounting to $2.8 billion, and looks set to be a major Permian player, though its acquisitions came in at a steep $37,000/undeveloped acre.

That looks better when compared to other recent Permian purchases, where land is going for as much as $60,000/undeveloped acre, according to Bloomberg. Those prices are ten-times what drillers pay in the Bakken field in North Dakota, where oil production has fallen off, according to EIA data, and the rig count has fallen. Parsley got a better deal than Concho Resources Inc.’s acquisition last year from Reliance Energy, where the price averaged $45,000/undeveloped acre.

Bloomberg is predicting the steep prices in the Permian will drive away some investors and trigger a backlash. Companies without a foothold will look elsewhere. This thinking explains why Exxon and Parsley made such big grabs, before prices really got out of control.

But for those with the wherewithal, the Permian pays off better than any other field. Occidental Petroleum Corp., which thinks of the Permian as its “growth engine,” has indicated its keeping its primary focus on its 2.5 million acres there, where production costs are so low a price threshold below $40/barrel still assures profitability. The Permian’s so rich, one Occidental exec noted to Natural Gas Intel, “It is pretty hard to drill a dry hole there.” With that in mind, however, Occidental has looked to cut its costs in the Permian by as much as twenty-five percent, in order to make up for steep losses in 2016 Q4. 

Other companies that are focused entirely on the Permian, like Diamondback Energy Inc., are not backing out. The company announced its production climbed thirty-eight percent, with Q4 production rising sixteen percent. The late-year boost, the result of the rise in prices on the back of the OPEC deal, helped out other Permian producers. But costs are rising, as running a well per-day rose from $13,900 to $16,000 in the space of a few months last year, according to CNBC.

The high price of getting into the Permian may be offset by the relatively low costs of producing there, as well as the abundance of oil and natural gas that await almost any driller who sinks a well. But if the land rush is in fact over, and attention swings elsewhere, the surge in Permian activity may slacken. That, of course, may be affected if the current bullish swing in prices comes to an end, and if analysts’ predictions of a sharp reduction in prices come to pass.

Some storm clouds related to the high cost of land may inhibit Permian growth, but with production costs low and opportunities bountiful, for those companies already invested the Permian will likely continue to pay off for at least the next year.

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silverer's picture

What we need is more oil on line. Just because.

svayambhu108's picture

ZH has come from asset to liability in just 8 years. pretty much what collapse will look like

FatTony7915726's picture

Why isn't WTI not dropping like a huge stone in water?????????

YouJustMadeTheList's picture
YouJustMadeTheList (not verified) FatTony7915726 Feb 17, 2017 1:43 PM

I haven't seen panic like this since Permian lost to Midland Lee after Boobie Miles blew out his ACL...

Al Tinfoil's picture

Because "Fundamentals" and the ever-rational "Invisible Hand" rule the markets.  Trust me.

SallySnyd's picture

Here is an article that looks at a recent change in legislation that will have a significant impact on the U.S. oil industry:

 

http://viableopposition.blogspot.ca/2017/02/flaring-natural-gas-oil-indu...

 

Congress certainly doesn't waste time when they have a "bee in their collective bonnets"

 

 

NoWayJose's picture

Running a well per-day does not cost $16,000. Drilling one might - but once drilled they just sit there unattended and suck the oil out.

Hohum's picture

The free cash flow of some oil companies suggests the process as a whole isn't cheap.  And you think the Permian would be more of a superstar:

https://www.eia.gov/petroleum/drilling/pdf/permian.pdf

innertrader's picture

FIRST, they don't "suck" it out, they "pump" it out.  Second, there is on going maintenance on wells and on site storage tanks, etc. etc. that has to be done regularly!  There are thousands of people hired to maintain these wells.  Many specialize in certain areas of maintenance, or do it all and have the proper tools and trucks to move those tools and crew if needed, from well to well.  Still, the average well doesn't usually cost $16k per month!  However, an average 8k ft well in west TX. could cost $40k per year plus $3k equipment replacement cost. 

Also, these operating cost change with the market and then there is the "secondary" production cost.

GUS100CORRINA's picture

Take a look at eia.gov ... Oil Chart Going to the Moon Alice!

GUS100CORRINA's picture

Take a look at eia.gov ... Oil Chart Going to the Moon Alice!

TheRealBilboBaggins's picture

I spent three years in the drilling sector  2012-2015, and watched a full bore boom and a full bore crash in that period.  I don't see any logic to what is going on in the Permian basin. 

Clearly they think they know something we don't.

It could be that the production of these new wells that are spooling up rigs to drill them, has already been forward contracted so there is no doubt if they will make money. If there is no breakeven or better money available for subsequent wells, they will just stack the rigs right back where they found them. When the bottom began to fall out in Appalachia in 2014, we continued to drill for some months just doing the backlog of contracted wells.

voxale's picture

Sockless Gartman must be short crude. 

Pasadena Phil's picture

And WTI continues its downward spiral. It's gone from $53.25 to $53.16 in the past 3 weeks alone!

We are increasing production for a very good reason. With more production comes more capacity and, gulp, more inventory. We are in the process of again becoming a net exporter and BIGGEST exporter of natgas in the world. We we don't already, we will soon again control the price of oil and all of the economic advantages that come with that. Isn't that a good thing?

You would think with the endless doom-and-gloom headlines at ZH and Oilprice.com, crazy people have taken over every energy company in the world and are determined to drown the world in oil. Time to take a deep breath and consider the possibility that the markets are telling us something. The "hidden hand" of free markets reappearing? Is it possible that apocalypse is NOT inevitable? Gasp!!!!!

Zeej's picture

go ahead and buy yourself some FANG, PXD, XOM, CVX etc. all and lets see where you end up in year or two...

 

J 457's picture

With central banks buying stocks you'll at least double your $$$!

RMolineaux's picture

Phil  -  You are overlooking the fundamentals.  In Saudi, you can poke a stick in the sand and produce liquid petroleum.  You can hire an impoverished South Asian for peanuts.  US producers will never again be able to match these costs.

J 457's picture

Once Trump announces Iran embargo and Mexico stops shipping oil to USA the price of WTI goes to $65-$70.  I'd say sooner than later.

Those with drills already in the ground will make a fortune.   

A. Boaty's picture

They have to work thru about 1 billion barrels in storage first.

RMolineaux's picture

I ask myself how the Permian drillers are achieving their "25%" cost reductions.  Might it have something to do with the use of "unconventional" methods of disposing of process water?   Are El Paso residents going to have to be drinking some very strange stuff, or will they have earthquakes a la Oklahoma?  And where are they getting all this water anyway?  From the Rio Grande?

Arnold's picture

Although things have slowed way down here in Pennsyltucky they continue work on the cracker.

http://www.eenews.net/stories/1059989886

 

Deep well injection was associated with minor earthquakes in the waste water injection wells in Ohio.

 

They were building a Recyko plant that showed promise.

http://www.nytimes.com/2011/03/02/us/02gas.html