Onshore Oil Rig

The number of oil and gas drilling rigs working in the U.S. has slid 6 percent since the end of 2022 and stood at 731 during the second week of May, Baker Hughes, a major oilfield services firm, reported.

During the same week this month, the number of working rigs tailored to drill gas wells shrank by 16, or 10 percent, the steepest weekly slide since 2016.

At the height of the shale oil and gas boom, the number of oil and gas rigs at work in the U.S. peaked at about 2,000 in mid-2014.

Emblematic of the current crash, auctioneer Kruse Asset Management is selling off two drilling rigs in Texas. When new, one fetched $40 million and the other $30 million; starting bids at the auction will be $12.9 million and $2.3 million.

“There’s no reason for them to be so cheap but there’s just no demand,” auctioneer Dan Kruse told the Financial Times.

Despite the post-COVID boomlet in oil prices, “the overall economy is still in a state of cautious uncertainty and [oil and gas drillers] are paying attention,” CEO Matt Johnson at data service Primary Vision told the FT.

Also, private companies were key to the shale boom. During the COVID War, many of them went bust and were bought by majors and other public companies.

Those that survive, such as Comstock Resources and Chesapeake Energy—which emerged from Chapter 11 bankruptcy in 2011—have reduced their ambitions.

Both announced they will scale back their work in the Haynesville Basin in Texas and Louisiana, once a key shale play.

Publicly-traded oil companies are cutting, or at least not expanding, their exploration and development budgets until the global economy chooses a direction. Also, investors are pressuring them to deliver higher dividends, as we detailed in “Oil Majors Withhold Investment in New Production” (3 Aug 2021) and “Oil Majors Use Cash to Buy Back Stock, Increase Dividends” (10 May 2022).

Thanks to shale, U.S. oil production peaked in November 2019 at 13 million barrels a day. Now that the shale play has cooled, that figure will fall to 12.6 million over the next 12 months, the U.S. Energy Information Administration predicts.

U.S. oil prices are around $70 now, more than a 40-percent plunge from the peak of $122.93 on 8 June last year. The price of domestic natural gas has tumbled by roughly two-thirds over the period to about $2 per million BTUs.

TREND FORECAST: Oil companies are bearing out our statement that they will adjust production to keep prices as high as possible for as long as possible as the world shifts to electric mobility and renewable energy resources.

At the same time, they continue to moderate prices and supplies enough to discourage a sudden surge in public conversion to renewables.  

Meanwhile, two forces are heading toward each other in the oil market. One is a reduction in demand as the global economy grinds slower. The other is a reduction in oil supplies as major producers refuse to expand production, which puts upward pressure on prices.

It is too soon to forecast how those factors will play against each other. While it is expected by The Street that a recession would cut both demand and price, there are too many wild cards, such as wars in the Middle East ramping up, the Ukraine War, etc. It should also be noted that when markets and economies were crashing during the Panic of ’08, oil prices spiked $147.27 on 11 July 2008!

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