Dr. Ken Rietz
Reuters has recently published an article that says that the number of oil and gas rigs in the US are declining, which is true. The unstated implication is that oil and gas output is also declining. We need to look more closely to get a more complete and accurate description of what is happening. But as we go on, we will need to look at a few graphs. The first one is the number of rotary rigs in North America for the past year.
Figure 1: Number of rotary rigs in North America. Source: Baker Hughes
You can easily see that the number has been declining in the recent past. Reuters’ report is correct, but it is not giving the necessary information.
The more important issue is how much crude oil is being produced. For example, there is a significant difference between horizontally drilled wells and the old vertically drilled, as much as 8 to 10 times the production for horizontal drilling over vertical. So, the relative number of rigs is not going to reflect production as much as the type of drilling used. Here is the graph of how many horizontally drilled wells are in operation.
Figure 2: Number of horizontal rigs in North America. Source: Baker Hughes
The number of horizontal rigs has also decreased. Since the discovery of horizontal drilling is recent, it has been improving over time. Therefore, fewer wells need to be drilled to maintain the amount of crude oil produced.
But this illustrates the more fundamental issue: How much oil is actually being produced? That is the subject of the next graph.
Figure 3: Oil produced in the US.
The graph is roughly constant over the past few months, and in a longer-term uptrend. There is little to suggest a decline in crude oil production right now, even if the amount of drilling declines. Natural gas is similarly positioned. Here is a graph of the natural gas in storage over the past two years, together with the prior 5-year maxes and mins.
Figure 4: Natural gas stored in the US
Again, there is no indication that there is any drop-off in natural gas supply.
The trading implications of this are fairly plain. The trajectories of prices of both crude oil and natural gas have not changed seriously in the past few months, despite the drops in the rig counts. Prudent investors would do well to expect US prices to remain fairly level, with a likely slight downtrend. Global prices, on the other hand, are likely to be more unpredictable.