Do Rig Counts Still Matter?

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Amid renewed concerns about the growth trajectory for U.S. oil and gas production, the latest data show upstream activity is at something of a standstill.

Barometers gauging expected trends in the U.S. oil and gas sector are fluid and variable, from the speed of drilling to the yield from each new well. But rig counts are still among the more important indicators of future growth expectations.

Not all wells are completed, meanwhile, so drilling is not a direct gauge of production trends, but given the lag time between new well completion and actual production, it can offer a loose gauge of what's to be expected several months out.

Oilfield services firm Baker Hughes Company (NASDAQ:BKR) (Houston, Texas) reported the total U.S. rig count was unchanged week-on-week to May, 31 at 600. That's down by 96, or some 14%, from year-ago levels.

Drillers are getting more efficient, though some of the activity can be linked to crude oil prices. The latest energy survey from the Federal Reserve Bank of Dallas found drillers needed an average price of $64 per barrel for West Texas Intermediate (WTI) to profitably drill a new well.

In the Permian Basin, the most prolific oil-producing basin in the country, the break-even is around $65 per barrel. WTI was trading at around $76 per barrel on Friday, though that's not been enough to incentivize further drilling.

"At these prices, there is no strong signal to increase or decrease production," John Kemp, a senior market analyst for the Reuters news service, wrote Thursday.

The rig count in the Permian is down around 10% from year-ago levels. In the nearby Haynesville play, rig counts are down about half from the same period in 2023.

Month-on-month, and oil production gains in the Permian are negligible, growing only by 0.3% from May levels to reach an expected average of 6.2 million barrels per day (BBL/d) in June. Haynesville oil production remains static.

Natural gas prices, meanwhile, have been hovering at near-record lows for much of the year, and off heavily from the peaks seen in the immediate aftermath of the Russian invasion of Ukraine in February 2022.

"The decline in gas prices since the middle of 2022 has been even more severe and has brought all growth in production to a halt," Kemp wrote.

While Haynesville oil production remains static, gas production is expected to drop off month-on-month by almost 2%. The largest inland gas producer, the Appalachia Basin, can expect to see a production decline of about a half percent, according to the U.S. Energy Information Administration.

The Permian rig count in 2014, the last time oil prices were holding in the low $100 range, was about 200 higher than today's levels, though production was far less than the current average. But the pace of production growth month-on-month is far lower than it is today, suggesting it's taking fewer rigs to elevate output.

Upstream players may be more efficient, while designating more and more capital to shareholder returns rather than production growth. But the United States remains a world leader in oil and gas production, despite the underlying market trends.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).