Conflicting messages from the US oil industry ought to make investors sit up and take notice as the number of rigs in use falls sharply this year.
Through all the comment and analysis of Opec and US oil production and global consumption data this year one important development seems to have been ignored – the continuing slowdown in drilling in the huge US unconventional sector.
Yes, thanks to the fracking boom – especially in the Permian basin in Texas output has jumped from 11.85 million barrels a day last December to around 12.1 million barrels last week.
After last year’s late sell-off oil prices are up more than 20% this year but that boomlet seems to be ageing Friday saw April West Texas Intermediate crude futures fall $US1.42, or 2.5%, to settle at $US55.80 a barrel in New York.
That was down 2.6% for the week, thanks to Friday’s sell-off. That was after a 6.4% rise in February.
It was a similar story for the global marker crude – Brent. May Brent futures settled at $US65.07 a barrel on Friday, down $US1.24, or 1.9%. Prices based on the front-month contract dropped 3.2% for the week after rising 6.7% for February.
The falls came despite more encouraging news on the Chinese economy and trade, although the US economy is now starting to show real signs of slowing.
And while the solid rise in prices has been going on US fracking companies have slashed the number of rigs they are using to drill for oil to a nine-month as on last Friday.
And US analysts reckon the same companies have lined up cost cuts of up to 20% this year – which points to less rig use and perhaps even a sooner than expected slowdown in US production.
Normally this would be positive for oil prices, but Friday’s weakness after the big rise in January and February shows a weaker than expected level of sentiment.
While President Donald Trump was tweeting warnings to Opec earlier in the week about prices and production, he must what could be a more influential factor closer to home.
But many analysts reckon the slide in rig use and forecast investment cuts are a reaction to the slide in prices in the final quarter of 2018 and the sector has been ignoring the rise in prices this year which have resembled a relief rally more than anything sustainable.
Drillers cut 10 oil active rigs in the week to March 1, bringing the total count down to 843, the lowest since May 2018, according to the weekly survey from the Baker Hughes energy services company on Friday. Large weekly cuts of 14, 24 and now 10 rigs have been reported so far this year as fracking companies have moved to limit spending and conserve cash flows as bond mates have closed for them.
The US rig count fell for a second week in a row (after sliding for five weeks in six in January and early to mid-February) but is still slightly higher than a year ago when 800 rigs were active.
All up there were 1,038 oil and natural gas rigs active in the United States last week, according to Baker Hughes data. That is down 3.7% from a total of 1,078 last December.
the Financial Times reported that US financial services firm Cowen & Co last week said early indications from the exploration and production companies it tracks point to an 8% in capital expenditures for drilling and completions in 2019.
Cowen, however, noted that if the remaining oil majors, including Exxon Mobil and Royal Dutch Shell, report planned spending in line with their peers, estimated 2019 E&P spending would be down just 6% overall from the US93.1 billion spent in 2018.
