Energy Ticker: Fewer oil rigs does not equal less crude, EIA says

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Fewer U.S. operating rigs don’t necessary mean less U.S. production, the EIA says.

SAN FRANCISCO — Fewer rigs may be pumping oil out of U.S. wells due to low crude prices, but that doesn’t mean U.S. oil production will be any lower.

That’s the word from the U.S. Energy Information Administration, the government agency tasked with keeping tabs on energy markets, including oil.

Lower crude prices are expected to further cut down on the number of operating U.S. rigs, but there’s more to production than that, the EIA said. Key factors include the efficiency of drilling, the rate of decline in production from existing wells, and changes in the amount of time between the start of drilling and the completion of the well.

An oil-well backlog in the U.S. will also serve as a cushion, at least through later this year, the EIA said.

Oil futures prices have lost nearly 60% from a 2014 peak in June of $ 107.26 a barrel. Prices have hovered at their lowest in nearly six years due to a global supply glut exacerbated by slackened demand.

Wall Street expects the oversupply to persist at least through the first half of 2015. The Organization of the Petroleum Exporting Countries has expressed no desire to cut down on its output, focusing on preserving market share versus other producers rather than help put a floor to prices.

The sharp decline in oil prices has had a significant effect on U.S. drilling activity, the EIA said. Citing data from oil-field services company Baker Hughes Inc. BHI, +0.80% the EIA said there has been a 16% decline in the number of active onshore drilling rigs in the continental U.S. from the end of October through last week.

In a January outlook, the EIA forecast Brent crude to average $ 58 a barrel this year and $ 75 a barrel in 2016, with New York-traded West Texas Intermediate forecast to be lower than Brent’s by between $ 3 and $ 4 a barrel during those years.

Prices around these levels would lead to a decrease in U.S. operating rigs by 24% from January to October, before a rebound in November, the EIA said.

Discussing how fewer operating rigs don’t necessary mean less production, the EIA gave the example of North Dakota in the 2008 downturn. Permits and drilling activity fell at the time, but “production rates did not decline as substantially,” the EIA said.

Oil broke a record of $ 145.29 a barrel on July 3, 2008, and the price increases before that peak created a backlog of wells that had been drilled but not yet completed, which acted as a cushion for production rates in the state.

A similar cushion this year would work itself out through most of the year in the U.S. “At most major plays in the United States, the backlog currently ranges from three to seven months,” the EIA said.

Of course, drilling activity could remain sluggish long enough to outlast that cushioning effect, and production rates could eventually suffer. But by then, oil could be fetching higher prices.

“While the cushion provided by the well-completion backlog changes from formation to formation, EIA’s forecast of rising crude oil prices in the second half of 2015, if realized, is expected to be accompanied by a stabilization of drilling activity that would be sufficient to prevent a substantial production decline in the Lower 48 region,” the EIA said.


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