How Will Crude Oil Prices Impact Rig Activity in the US This Year?
By Dan Boaz
It comes as no surprise to learn that the major decline in oil prices over the last four months is having an impact on overall drilling activity but contrary to many predictions this doesn't automatically equate to lower levels of oil production for 2015 in the United States.
In fact although new studies from the U.S. Energy Information Admininistration show that onshore drilling activity has definitely slowed since November 1st, total production in the nation is anticipated to rise again this year. Forecasting is far less of an exact science when the market is quite so volatile of course but the latest analysis does include some revealing data for everyone connected to the industry.
According to reports contained in the monthly Short Term Energy Outlook (STEO) the barrel price for crude oil may slowly recover this year to average $58/barrel while growing to $75/barrel in 2016. Such estimates will need to be reviewed on a constant basis with the market currently so atypical but if the predictions are close to being accurate it will have a definite impact on domestic rig activity overall. According to the study if this pricing model is on the money operating rig activity could decrease by up to 24% during the first three quarters of the year before improving once again in the fourth quarter.
The underlying consideration in terms of net impact to the domestic energy industry and the hot shot trucking companies that support it are likely be less consequential however as even with that decline in rigs overall oil production is still slated to increase over the course of 2015. The most interesting information being that changes to the makeup of the sector aren't fully in line with pricing dips. This is due to so much activity having long lead and planning times, therefore the ripple can occur three to six months after any great fluctuations in pricing and even with that in mind the scope of the impact isn't as violent as the percentage of crude price changes would suggest. Today's graphic above also suggests that increased efficiency of existing and new wells could lead to a plateaued effect on operational rigs regardless of pricing based on the latest forecast for this year and next.
Conversely, I've also seen a number of stories over the last week from industry analysts who feel that the barrel price could climb to substantially higher levels than before the slump and much sooner than you may expect such as this recent story from USA Today about predictions made by John Hofmeister the former president of Shell Oil. In the meantime with oil closing at $45.15/barrel today even the events over the next week or two will have many in the energy sector glued to their ticker feeds. Would you hazard a guess at where crude oil prices will rest in three months time?
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