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U.S. Oil Rig Count Rises as Oil Plunges

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US Oil Rigs

U.S. Oil Rig Count Rises as Oil Plunges

Aug 17 2015, 08.16am GMT


The large increase in shale oil production during the past five years was in many respects the catalyst for the current OPEC initiated oil price war.

The higher production cost of U.S. shale oil makes it unprofitable at current prices and this accounts for the decreasing production from that source while the number of rigs in the U.S. continues to grow.

Baker Hughes, the oil services firm, reported that the number of U.S. oil rigs increased for the fourth successive week to a total of 672 on Friday. This is however a decrease of 245 on the number a year ago.

Oil futures have tumbled over the last few days which may be an indication that the deliberately planned glut of oil on global markets, as a result of continuous overproduction resulting from the OPEC strategy, is placing higher cost producers in the firing line.

Earlier on the NYMEX, September delivery light, sweet crude traded at $41.88 per barrel at 03:40 GMT, while on the London ICE Futures Exchange, October Brent crude fell 64 cents to $48.55 per barrel.

While OPEC might currently appear to be winning the battle, the final results of this particular war are far from clear cut. There are a number of factors related to global production costs that could cause OPEC to abandon its overproduction strategy thereby allowing prices to rise. On the other hand, low production costs mean the organization could maintain its currently high rate of production.

Knoema statistics on the cost of oil production are revealing while at the same they conceal the size of certain production cost inputs. The chart shows some of the major producers and their costs per barrel.

    Marginal Production Cost: $ in 2014
Russia Arctic 120.00
Canada Sand 90.00
United States Shale 73.00
United States Deep Water 57.00
Venezuela Average 20.00
Russia Onshore 18.00
Iran Average 15.00
Iraq Average 6.00
Saudi Arabia Onshore 3.00

The capacity of the OPEC producers to survive even lower prices becomes apparent, although the unknown factor is the value of tax and other state charges that are levied on the oil suppliers and to what extent governments would be prepared to reduce these charges.

A CNBC article on 12 January 2015 presented statistics to show that only 1.6% of global oil supply (mostly Canadian) becomes unprofitable at $40 per barrel.

James Williams, an economist at WTRG Economics explained the increase in the number of rigs despite the lower prices saying, “The recent increase in rig counts is due to prices two months ago. There always a lag between price changes and drilling activity.”

United States production has decreased, but not at the sort of rate that many had anticipated. Technological improvements in shale oil extraction methods have resulted in a lowering of the producer cost which could account for the slower rate of decline in production from that source.

“Costs are down, rig efficiency is up, and they’re drilling in places where they get more wells,” added Williams. “It seems every month somebody has a new and better way to frack a well, plus, their competition efficiencies are increasing.” 

There are two major factors which should ensure that oil prices won't pick up again in the near future.

The one is the depressed state of the global economy, particularly in the big oil users such as China, which means demand for oil will not be increasing for some time.

The other very important factor prompting low cost producers to maintain their high levels of production is protection of their market share in the face of greater competition from non OPEC suppliers. This in some measure accounts for the increase in production we are currently seeing coming out countries such as Saudi Arabia, Iraq and Russia.



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