The U.S. oil drilling rig count rose for a second week in a row despite a massive drop in both oil and natural gas prices this week and projections by many analysts that the number of rigs will fall as producers deepen their spending cuts on new drilling.
Companies added one oil rig in the week to March 13, bringing the total count to 683, their highest since December, energy services firm Baker Hughes Co. said in its closely followed report on March 13.
That is down 18% from the same week a year ago when 833 rigs were active.
U.S. crude futures traded around $32 per barrel (bbl) on March 13, putting the contract on track for a weekly drop of 23%, its biggest weekly decline since the 2008 financial crisis, as the coronavirus outbreak threatened demand and crude producers promised more supply.
That oil price collapse occurred after Saudi Arabia decided to start an oil price war with Russia after Russia failed to support OPEC’s latest plan to cut crude production to support oil prices.
Looking ahead, U.S. crude futures were trading around $34/bbl for the balance of 2020 and $39 for calendar 2021. That compares with an average of $57.04 in 2019.
Numerous North American producers this week announced deeper spending cuts, including Occidental Petroleum Corp., Marathon Oil Corp., and Diamondback Energy Inc. due to the price slump.
With companies planning to slash spending on new drilling, the U.S. Energy Information Administration (EIA) this week projected U.S. crude output would drop to 12.7 million barrels a day (MMbbl/d) in 2021 from an expected record 13.0 MMbbl/d in 2020.
That decline in 2021 would be the first cut in U.S. output since 2016 and compares with EIA’s prior forecasts of 13.2 MMbbl/d in 2020 and 13.6 MMbbl/d in 2021.
The oil rig count, an early indicator of future output, dropped by an average of 208 in 2019 after rising 138 in 2018 as independent E&P companies cut spending on new drilling to meet shareholder demand for better financial returns in a low energy price environment.
Even before the oil price collapse this week, most U.S. E&Ps had already said they planned to reduce capex on new drilling for the second year in a row this year, by cutting around 11% in 2020 after trimming about 5% in 2019.
Morgan Stanley said in a report that on average E&Ps so far this week have cut spending by 27% versus prior guidance. The bank said they expect this trend of revisions to continue in the coming weeks.
U.S. financial services firm Cowen & Co. said 44 independent E&Ps it watches reported spending estimates for 2020, implying a 17% year-over-year decline in 2020.
Before the oil price collapse this week, Cowen said the independent E&Ps were only expected to cut spending by an average of 11% from 2019 levels, which was the same that they cut in 2019 from 2018 levels.
The number of U.S. gas rigs, meanwhile, fell to 107, the lowest since October 2016.
Year-to-date, the total number of oil and gas rigs active in the United States has averaged 791. Most rigs produce both oil and gas.
Analysts at investment bank Stifel projected the U.S. onshore oil rig count would drop by around 250 rigs this year. Advisory firm Evercore ISI said the U.S. rig count would decline more than 25% in 2020.
There was an average of 943 total rigs active in the United States in 2019.
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