16 Sep 2016

What’s wrong with this picture (Baker Hughes Rig Count up 102)?

Can you tell what is wrong with the picture of the drilling rig (above)? The problem is, it is drilling!

In case you missed it, Baker Hughes reported today that the U.S. rig count stood at 506, which is 102 more than at the current cycle’s trough of 404 rigs back on May 27, 2016.

The chart below illustrates the trend.

bhi

For those looking for an end to the global oil price slump, more rigs working in the United States is bad news. Oil markets are still oversupplied, and the IEA recently forecast a slowdown in oil demand for 2016.

In its September 2016 Oil Market Report, the EIA projected global oil demand to increase 1.3 million barrels of oil per day (BOPD) this year, a level 100,000 BOPD lower than its previous estimate. The IEA also reduced its estimate for global oil demand in 2017 with demand expected to grow 1.2 million BOPD, 200,000 less than its earlier estimate.

At this time, the world has more oil than it needs at prevailing prices, ranging between $44 to $50 per barrel. Given the weakened demand outlook, putting more rigs to work drilling in America’s prolific resource plays in the Permian Basin, DJ Basin and Eagle Ford trend only extends the duration of the oversupply.

Current trends suggest that demand growth, at least for the foreseeable future, will not be strong enough to bring the global oil market back into balance in 2016 or even 2017.

To rebalance the market in the near to medium-term, production must be curtailed. However, as I mentioned in Summer 2015, the world can no longer count on OPEC (led by Saudi Arabia) to be the swing producer, now that the cartel has dropped its long-held policy objective of maintaining price stability in favor of maximizing market share.

OPEC’s new policy, in effect, has made the United States the world’s unexpected swing producer, with supply governed by set by the laws of free markets and capital allocation. If drillers believe they can make money with WTI at $40, then drillers gonna drill! But, that only exacerbates the current oversupply.

Consequently, we should not be surprised to see WTI take another leg down into the $30s before we see meaningful improvement in long-term oil market fundamentals.