US Oil Rig Count Surges By Most In 7 Months - Will Shale Show Restraint?

Just as we suggested, US oil rig counts surged last week, tracking the lagged uptick in WTI prices and suggesting production's upward path will continue (after last week's weather-impacted drop).

US Oil Rig Count rose 10 to 752 last week - the most since June 2017...

 

https://www.zerohedge.com/sites/default/files/inline-images/20180112_rig.png

 

The question is - as OilPrice.com's Nick Cunningham asks (and answers) - Will Shale restrain itself?

Brent recently hit $70 per barrel and WTI surpassed $64.50, and oil executives from the Middle East to Texas no doubt popped some champagne. The big question is whether or not U.S. shale will spoil the party by ramping up production to extraordinary heights, setting off another downturn.

The EIA made headlines a few days ago when it predicted that U.S. oil production would surge this year and next, topping 11 million barrels per day by the end of 2019.

But shale executives repeatedly promised their shareholders that they would be prudent this time around, eschewing a drill-no-matter-what mentality that so often led to higher levels of debt…and ultimately to lower oil prices. Shale executives repeatedly insisted in 2017 that they would not return to an aggressive drilling stance even if oil prices surged.

We will soon find out if oil in the mid-$60s can entice shale drillers to shed their caution and jump back into action in a dramatic way. For its part, Goldman Sachs seems to believe the promises from the shale industry.

The investment bank said that at an industry conference in Miami on January 10-11, shale executives reiterated their strategies of caution. “Shale producers are largely not looking to use $60+ oil in their budgets and spoke more proactively about debt paydown, corporate returns and returning cash to shareholders.”

This newfound restraint would contribute to still more gains in oil prices, the investment bank said. “With Discipline along with Demand and Disruptions (the 3 Ds) key drivers of Energy equity sentiment, we see potential for a grind higher as long as datapoints are favorable,” Goldman wrote. Global oil demand is set to grow at a robust rate this year, and a series of disruptions could keep supply offline in places like Venezuela, Iraq, Iran, Libya and Nigeria.

It remains to be seen if Goldman, along with the rest of us, are being taken for a ride by the shale industry. The investment bank said that guidance announcements in February will be “key” to figuring out if shale drillers will follow through on their promises of restraint for 2018.

But based on a series of comments at the conference, Goldman cited a long list of shale companies that will use extra cash from higher oil prices to either pay down debt or to pay off shareholders rather than using that cash for new drilling. “In particular, E&Ps highlighted debt reduction (SWN, CLR, RRC, DVN, APA, EOG, MRO, RSPP, WPX), dividends (OXY, COG, MRO, EOG) and share repurchases (APC) as potential options for redeploying greater cash ?ow,” Goldman wrote in its report, using the ticker symbols for the companies who spoke at the conference.

There were a few companies that signaled an openness to new drilling if oil prices continued to rise. “FANG, JAG, PDCE and XEC noted higher cash ?ows will allow their ?rms to raise drilling activity over time,” Goldman said, although they voiced caution about the recent run up in prices as evidence that prices will remain elevated. Moreover, any uptick in drilling in response to price increases might not result in production changes before the end of 2018.

Another uncertainty that could blunt the euphoria surrounding the recent oil price rally is the rising cost of production. With drilling on the upswing, oilfield services companies are looking to claw back some of the ground that they felt compelled to cede to producers in the past few years. That means higher prices for the cost of completions, rigs, sand and other services and equipment. Goldman predicts cost inflation from oilfield services on the order of 5 to 15 percent year-on-year.

The investment bank said that the winners will be the “operators that are able to mitigate higher service costs through productivity gains and more ef?cient operations will attract investor interest in 2018.” Goldman singled out Pioneer Natural Resources, EOG Resources and Occidental Petroleum, a few companies that are typically cited as some of the strongest in the shale patch.

So, at least according to the latest comments from shale titans, the industry appears resolved to stick by its word to not drill recklessly. That could lessen production gains from the U.S. over the next year or so…which would provide more upward pressure on prices.

Comments

Dave jmack Fri, 01/12/2018 - 15:29 Permalink

Who are "we" that completed 5 wells? It has been my experience over the last 45 years that rig counts usually increase after new year when drilling budgets are authorized. This isn't an indication of anything. Just noise.

In reply to by jmack

yogibear Fri, 01/12/2018 - 13:29 Permalink

LOL, These shale boneheads can't wait to produce and go bankrupt again.

So go ahead and produce, drive down the price and go bankrupt.

Give me a chance to short oil again and make some $$$$

Juggernaut x2 yogibear Fri, 01/12/2018 - 13:34 Permalink

The Fed stepped in when oil hit $26/barrel in March 2016- the Dallas Fed actually had an emergency meeting at that point with regional banks that had invested heavily in shale producers when oil was at $80, $90, $100- the banks' exposure to shale debt means that the Fed will step in when the price of oil dips to a certain point- another example of lack of price discovery 

In reply to by yogibear

yogibear Juggernaut x2 Fri, 01/12/2018 - 13:38 Permalink

Just like the Federal Reserve's endless bond saving.

Bonds drop, rates start spiking,  Federal Reserve comes in and buys.

Next Munis and corporate. And they will buy.

Only thing that stops the Federal Reserve in it's tracks would be a currency crisis.

Don't see that happening anytime soon. They'll destroy any nation trying to reveal their con game.

In reply to by Juggernaut x2

MK ULTRA Alpha Catahoula Fri, 01/12/2018 - 14:28 Permalink

I'm predicting a range of production between 12 million to 14 million barrels per day over the next three years from the present 10 million barrels per day.  There is a much greater emphases on US based hydrocarbon production especially when most all US regions have been opened up. Increased hydrocarbon production won't depend solely on Shale production. 

When the complete picture of Canadian and Alaskan hydrocarbon production is included, there is a good chance, North American hydrocarbon production will satisfy most of the US demand of 20 million barrels per day.  That's the shock, the end of US reliance on OPEC hydrocarbons.

In reply to by Catahoula

Money Honey Fri, 01/12/2018 - 14:12 Permalink

Will Crude Oil Prices hit $55 before Rising to $82, or Continue this Rally?

http://www.commoditytrademantra.com/crude-oil-trading/will-crude-oil-pr…

 

Oil prices are treading water above $US 60/B (WTI) again, the first time since 2015. The current commercial short position of 1,414,461 short contracts in crude oil is a record short position. The bottom line is that investors are excessively optimistic while Commercials are at a record level of bearishness. What is unknowable is whether a pullback will be short and shallow or long and deep.

NoWayJose Fri, 01/12/2018 - 14:25 Permalink

If Goldman says shale drillers will pay down debt with oil at $64.50 you can bet who went long oil at $53, blew up some pipelines to ignite momentum, and who has manipulated futures prices higher!

No shale driller in debt is going to pass up the chance to lock in $60+ oil at 3 year highs!