The US oil rig count continues to drop, falling by 3 to 710 for the week ending October 4, according to Baker Hughes data. It is now 18 percent down on the same week last year, a loss of 151 rigs, reflecting weaker oil prices, a steady deterioration in the global economic outlook and consequent downward revisions to forecast oil demand.
However, US shale will enter a period of dormancy rather than defeat. Shale oil’s most enduring legacy has been the introduction of a large element of price-responsive oil production. Shale producers retreat in the face of weaker market sentiment so that production responds to price changes, both up and down, over a period of about six to 12 months. Shale drillers also have a unique storage option in the form of drilled-but-uncompleted wells, which allows production capacity to remain in the wings ready to be brought on-stream if demand rises.
Automatic cost adjustment
Moreover, a pull-back in shale drilling has an immediate impact on the US oil services sector. Less drilling results in spare capacity pushing down the price of everything from fracking sand and chemicals to on-site power generation and drilling rig day rates. Inefficient rigs are laid up and less prolific shale plays are temporarily abandoned.
Just as production volumes react to lower oil prices, the cost of producing shale also falls. US shale goes into a period of dormancy from which it retains the capacity to emerge as strong as ever. The longer…