Events that happen today don’t always show their impact until later. Sometimes much, much later. Tsunamis can occur several hours after the initial earthquake. And, as much as markets have access to an over-abundance of information, the impacts of trends currently happening on the ground (or rather, under the ground) aren’t always obvious until they hit.
Take US crude production, for example. The story over 2018 and 2019 was the quick acceleration of American crude output, powered by the shale revolution. The US has now overtaken Saudi Arabia and Russia as the world’s number 1 oil producer. Total production blasted past the 12 mmb/d level in 2018, and heady forecasts predicted that output could comfortably reach 14 mmb/d by the end of 2020. The amount of US crude flowing – onshore and offshore – has upended world crude price dynamics, and also bestowed cheap fuel on the US, powering its economy. The trends have also spilled over in the gas markets, where the US is currently enjoying historically low natural gas prices domestically and in the process of transforming itself a major LNG exporter.
To assume this will continue is a fallacy. The scenario occurring today is happening because of what happened several years ago. Looking at the data of active US oil rigs available from Baker Hughes – which is taken as a proxy for the level of upstream activity in the country – and the US crude production numbers from the EIA shows an evident lag between the two indicators. There appears to be a two-year lag between activities in the drilling sector with impact on output. Between December 2016 and December 2017, when the active oil rig count increased by 272, crude oil production only increased by 1.18 mmb/d; but between December 2017 and December 2018, crude oil production jumped by 2.06 mmb/d. Between December 2017 and December 2018, when the active oil rig count growth slowed down to 128, crude oil production growth also slowed down to only 800,000 b/d between December 2018 and estimates for November 2019.
To be fair, there are many other factors that impact production. But the active oil rig count is a significant indicator, and indeed predictor, of future output. Which is why current trends in the US active rig count are worrying. Between December 2018 and November 2018, Baker Hughes reports that the active oil rig count in the US declined by 206 – a 31-month low. And the decline seems chronic. Within that data, much of that decline comes from onshore rigs, particularly in the Permian and Eagle Ford basins. At current trends, the oil rig count could fall below 600 by early 2020. Given that shale fields have a prolific initial production period, followed by a sharp decline, this is worrying. US oil production could actually decline in late 2020, early 2021.
Of course, there are other things to consider. Consolidation is ongoing in the Permian, which may be reducing rig count but increasing productivity. With the investment community has turned against shale, drying up capital, some small- and medium-scale drillers are going bust. These assets, sometimes in high-opportunity areas, are being plucked off, as the big guys – the ExxonMobils, the Chevrons and the BPs – move in. There are many reasons why the active rig count might be dropping, but the main reasons remains that drilling just isn’t as attractive anymore. That itself will never translate 1-to-1 to production trends, but it will have a definite material impact. A reversal in US oil production growth is unlikely; what’s more likely is that the explosive growth will slow down. In fact, it already is. An average production level of 13 mmb/d is still achievable within six months, but the 14 mmb/d level looks very far off. Don’t be fooled by the surface image of current US oil output. Trying times are coming, and if you paid attention to the indicators, you would have known it is coming… and can prepare for it.
US Active Oil Rig Count vs US Crude Production
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