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Arthur Berman

Arthur Berman

Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and…

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Expect The Recent Oil Rally To End Badly If OPEC Doesn’t Cut

Expect The Recent Oil Rally To End Badly If OPEC Doesn’t Cut

The U.S. rig count dropped by 10 rigs this week after only falling by 3 last week. No doubt some analysts will say that this increase is somehow important and that a return to normal–i.e., high oil prices–is around the corner.

Well, don’t get too excited because the rig count that matters–the horizontal Bakken, Eagle Ford and Permian plays–only fell by 2 rigs after not falling last week. This is a normal fluctuation when oil is $100/barrel. Related: Market Fundamentals Make Oil Price Increase Unlikely

berm1min

Table 1. Rig count summary by play through May 29, 2015. Source: Baker Hughes & Labyrinth Consulting Services, Inc.

(click image to enlarge)

The rig count decline is effectively over as shown below in Figure 1.

berm2klein

Figure 1. Tight oil horizontal rig counts. Source: Baker Hughes & Labyrinth Consulting Services, Inc.

(click image to enlarge) Related: Top 5 Solar Markets in Asia

Production has fallen and will fall more but rig count is the wrong measure at this time. The real measure is capital given to U.S. tight oil companies. And there seems to be plenty of really stupid capital that thinks that investing now means buying low. Good luck with that once oil prices fall.

Figure 2. Bakken, Eagle Ford and Permian “Shale” tight oil production. Source: Drilling Info & Labyrinth Consulting Services, Inc.

(click image to enlarge)

There have been a steady stream of articles championing the ingenuity of U.S. tight oil producers for figuring out how to maintain production with fewer rigs. It doesn’t strike me as ingenious to produce more oil at low prices that ensure losing money. Related: Investors Turning Away From Green Energy

OPEC will meet on Friday (June 5, 2015) and most doubt that a production cut will result. If that is the outcome, expect the recent rally in oil prices to end badly. If producers cared about their investors and shareholders, they would be slashing production by shutting in wells. That might help oil prices rebound sooner and then, they could sell the oil at a profit instead of losing money while celebrating their own ingenuity.

By Art Berman for Oilprice.com

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Leave a comment
  • Lenb on June 01 2015 said:
    agree with most of what u said except for main point...if there exists little expectation for an opec cut why would the meeting matter at all unless they raise output? To me thats more logical.
  • Brian B. on June 02 2015 said:
    Len. I agree with you. The fact that OPEC is leaving production alone is already mostly built into the current price. Nearly everyone who has been paying attention to the current price drop in oil knows full well that OPEC is not going to cut production. When it's announced, it won't even hardly be a "blip" on the radar screen. Now, on the other hand, if they announce a cut, then there will be sheer pandemonium to the upside.

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