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.
Figure 1. Tight oil horizontal rig counts. Source: Baker Hughes & Labyrinth Consulting Services, Inc.
Figure 2. Bakken, Eagle Ford and Permian “Shale” tight oil production. Source: Drilling Info & Labyrinth Consulting Services, Inc.
There have been a steady stream ofarticleschampioning 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.
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 share holders, 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.