U.S. Drillers Cut Rigs, But Remain In Saudi-Russian Firing Line
Investing.com | Mar 11, 2020 17:45
Blamed partly for the biggest price drop in three decades and awaiting doom to be unleashed upon them by the Saudis and Russians, U.S. shale drillers are pictured again as the poster boys of notoriety for overproduction in oil.
Yet, U.S. oil rigs — a trusted indicator of production, even if lagged — are down by 152 or 18% year-on-year. This means that although U.S. crude output hit a record of 13.1 million barrels per day at end-February, the industry was working to cut production.
Of course, shale drillers weren’t always the best behaved lot.
Once Guilty of Self-Destruct/h2
Many were guilty of self-destruct in the middle of the last decade, when they pumped like there was no tomorrow. At the height of the industry’s indiscretion in October 2014, there were 1,609 rigs in operation. That drove U.S. crude prices down from highs of above $100 per barrel to around $26, unleashing more than 100 shale bankruptcies in just 18 months.
And as though they hadn’t learned their lesson, U.S. drillers were again running with spigots fully open two years back. This time, the rig count ballooned from a low of 316 in May 2016 to 873 by December 2018. More crash and burn followed.
But since then, the so-called U.S. oil frackers — shorthand for the hydraulic fracturing of oil they engage in — have been mostly disciplined, resisting rig builds even when U.S. crude reached a 2019 high of nearly $77 a barrel.
Exemplary Restraint Now/h2
To the disappointment of oil bears, who had counted on the fracking community to repeat the boom-and-bust practices of past years, many in the shale business have focused in the past two years on cutting expenditure, preserving capital and paying investors decent dividends.
Despite their restraint, U.S. crude production has grown by more than 2 million barrels per day on average since the end of 2018, making the United States the world’s largest producer. On the flip side, the country has also become a net oil exporter, achieving its 40-year quest for energy independence.
So, when the Saudis and Russians declared a war for oil market share this week — with the ostensible target of bringing down U.S. shale, which they believe to be responsible for their woes — the question to be asked is why is there a continued disconnect between falling oil rigs and U.S. production rates?
The answer, it would appear, is that drillers have been cutting, but not in their most productive or economic fields. The slow-but-sure finishing by frackers of drilled-but-uncompleted (DUC) wells has also brought more oil to the field, without adding to rig counts.
After Monday’s 25% crash in U.S. crude prices — the biggest drop in three decades, eclipsed only by even bigger percentage losses in shares of shale drillers — drillers continued to pledge fiscal discipline.
More Discipline To Come/h2
Diamondback Energy (NASDAQ:FANG) cut its activity from nine completion crews to six, dropping two more completion crews than scheduled. The shale producer said it will also cut capital spending, though it didn't specify an amount.
Parsley Energy (NYSE:PE) said it has slashed its 2020 free cash flow outlook to at least $85 million from a prior view of at least $200 million, and announced a general activity slowdown as well.
EOG Resources (NYSE:EOG) also intends to curb spending to protect returns to its shareholder dividend, saying it will release details later.
Occidental Petroleum (NYSE:OXY) said it was trimming its dividend to $0.11 from $0.79 per share. The company also said it will reduce 2020 capital spending to between $3.5-3.7 billion from $5.2-5.4 billion and implement additional operating and corporate cost reductions.
Saudi-Russian Pressure Cannot Be Underestimated/h2
“The prospects of WTI oil prices in a $30-$45 per bbl range through mid-2021 would likely cause U.S. producers to lower activity to better manage capex/cash flow,” Goldman Sachs said in a note on Wednesday.
Wall Street’s leading voice in energy trading also had no illusions about the sheer pressure the Saudi-Russian campaign would bring to bear on shale in the coming months. Goldman added:
“We are now returning to a shale scaleback period last seen in response to (the) 2014 oversupply (situation) and OPEC’s decision to favor market share.”
Get The App
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.