Page 11 - NorthAmOil Week 20

NorthAmOil COMMENTARY NorthAmOil
Rigs sink but prices stay buoyant as WTI June contract expires
US rig counts have sunk to historic lows for a second consecutive week, but WTI prices avoided another crash as the June contract expired
US
WHAT:
US rig counts fell to record lows for a second straight week, but WTI prices are at their highest in around two months.
WHY:
Output cuts and early signs of demand recovery are helping to prop up crude prices.
WHAT NEXT:
US rig counts are not thought to have bottomed out yet.
NEWS in recent days has been mixed for US oil and gas producers. On one hand, rig counts continue to decline, and fell to record lows for the second consecutive week in the week up to May 15. At the same time, though, fears that the price of West Texas Intermediate (WTI) would crash again as the June futures contract expired this week have been alleviated. Indeed, instead of falling, WTI has risen to levels not seen since the first half of March, and was trading at around $33 per barrel on May 20.
Despite this strengthening in prices, rig counts are not thought to have bottomed out yet, and are anticipated to be cut further amid uncertainty over the ongoing impact of the coro- navirus (COVID-19) pandemic. Fuel demand is starting to show early signs of a gradual recovery but there is considerable uncertainty over how and when a potential second phase of global lockdowns could take place, and producers will not be in a hurry to scale up activity again.
New lows
In the week ending May 15, the combined US oil and gas rig count dropped to 339 from the previous week’s record low of 374. This compares
with 987 active rigs this time a year ago, and 792 in the week up to March 13 – the week that the oil price collapsed on the failure of OPEC+ talks amid concerns over an escalating oil price war between Saudi Arabia and Russia. Rig counts started falling the following week, as the spread of COVID-19 landed a further blow to oil prices that were already severely under pressure.
The oil rig count has dropped by 62% over the course of two months, from 683 on March 13 to 258 on May 15. The prolific Permian Basin continues to account for the bulk of active oil rigs, but the count there has fallen to 175 from 418 in mid-March. Such low levels of rig activity were last seen in the Permian in the summer of 2016, shortly after the lowest point of the last oil price downturn. Indeed, rig counts tend to lag oil price trends, which backs up expectations that US rig activity still has further to fall.
Outside the Permian, only the Haynesville and Marcellus shales – dry gas-producing regions – still have rig counts in the 30s, while in all other shale plays, rig counts are now in the 20s or below.
The Permian Basin is also expected to lead the way in falling production. According to the
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