While speculation continues about whether drilling activity in the U.S. oil patch has hit rock bottom yet, some analysts believe that the industry is already on the path to recovery. Reuters analyst John Kemp expects drilling rates to start picking up in September and October, with production beginning to recover in the second quarter of 2021.
Kemp states that over the last 30 years, changes in futures prices have typically been followed by changes in drilling with an average delay of 4-5 months, while changes in output usually materialized after 9-12 months.
Given the run up in WTI crude prices during the months of May and June, some drillers are now beginning to bring back shut-in production and are already preparing new drilling programs for this fall.
According to data from Rystad Energy, the pace of reactivation of curtailments has accelerated since July, with most operators planning to bring back all shuttered production in September.
Large U.S. shale firms such as EOG Resources and Parsley Energy are not just looking to bring back production from shuttered wells, but are also planning to “accelerate” production in the second half of 2020.
Early indicators for drilling activity, such as the Baker Hughes rig count and Primary Vision’s frac spread (a more direct indicator of hydraulic fracturing fleets in the field), are reflecting a cautious uptick in drilling activity during the last two weeks of August.
According to Kemp, the U.S. rig count is poised to recover during Q3 and Q4 of this year as drillers begin to react to improving prices which have brought a period of relative stability and low volatility to oil markets.
Oil production, however, will continue to plunge during the next couple of months, impacted by the still low drilling rate and the 50-60 percent annual decline rate seen in many shale wells.
It’s tough to say exactly when production will turn around. $40 WTI might not be enough to fuel the next shale boom, but $50+ oil could entice a large number of companies to expand drilling activity.
The global crude demand recovery and the course of oil prices in Q3 and Q4 will play a major role in the decision-making process of U.S. drilling firms, and a lot will depend on the cash-flow outlook of individual wells.
While even the EIA remains negative on the prospect of a quick rebound in U.S. production, more positive analysts generally expect the inflection point to be somewhere at the end of Q1 2021.
With both OPEC+ and U.S. producers bringing production back to the market, it remains unclear whether there’s demand for these additional barrels or if a new wave of crude will result in yet another price meltdown.
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