US Rig Count Recovery Hinges on $50 Oil Post-OPEC Meeting

Maritime Activity Reports, Inc.

September 30, 2016

U.S. oil drilling has seen its best quarter since crude prices tumbled two years ago mainly due to small operators returning to the well pad, but analysts say the continued recovery in the rig count depends on whether OPEC's output reduction plan can bring the market back to $50 a barrel.

Since May, drillers have added 100 oil rigs with the rig count rising to 416 rigs last week, that included the most additions in a quarter since the first quarter of 2014, according to oil service firm Baker Hughes Inc.
The number of rigs had plunged from a record high of 1,609 in October 2014 to a low of 316 in May after crude prices collapsed in the biggest price rout in a generation, in part due to U.S. shale producers adding to a global oil glut.
Private or mom-and-pop type drillers, commonly running one or two rigs, accounted for up to two-thirds of the rig count increase, analysts said, which came after U.S. crude futures topped the key $50 mark that spurred producers to return.
Even though U.S. prices have mostly languished in the mid $40s since June, the rig count continued to climb in the longest streak without a cut in two years, but the rate of increases has slowed over the last month.
"Given oil's move from $50 to $45, this likely hit the cash flows of the private operators who have added a large portion of the rigs," said James West, senior managing director and partner at Evercore ISI, a U.S. investment banking advisory.
He said those drillers may "choose to conserve capital," forcing them to drop rigs.
The proposed production curbs by the Organization of the Petroleum Exporting Countries (OPEC) has boosted U.S. crude prices about 8 percent this week to around $48, with futures for 2017 trading above $51 and 2018 futures at over $53.
With the higher prices, analysts said larger drilling firms, such as Anadarko Petroleum Corp, Southwestern Energy Co and WPX Energy Inc, will likely follow through on longer-term plans to put more rigs into operation.
"Mid to larger companies are looking to add rigs," said Trey Cowan, senior industry analyst at Platts RigData, a forecasting unit of S&P Global Platts.
"If prices hold around $45, those guys would more than make up for seasonal declines we usually see in the fourth quarter and any losses you may see from smaller operators," Cowan told Reuters before OPEC's announcement on Wednesday.
Platts RigData, which makes rig count projections, expects U.S. oil and gas land rig counts to rise from an average of 449 in 2016 to 579 in 2017.
(By Scott DiSavino; Additional reporting by Barani Krishnan; Editing by Marguerita Choy)
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