Two measures of industry activity show that there are fewer wells being drilled and much fewer wells being completed now versus earlier this year and a year ago.
The chart below shows the number of oil-directed drilling rigs per Baker Hughes and frac crews (aka frac spreads) per data provider Primary Vision. This week, the number of oil-directed rigs fell by 58, or over 10%, to reach 504 deployed. Last week alone. This week, it had also fallen almost 10%.
But another metric might mean more for the number of new wells in the near term: The number of frac crews fell to its lowest reading since the 2016 downturn, at 185. In each of the last two weeks, the Frac Spread Count dropped 30. It was a one-week drop of 30, and it is only half what it was in 4Q2019. In mid-November 2019, that count had been twice as high, at 377.
Taking the rig count and the frac count together, it means that both the number of new wells being drilled and the number completed are likely falling fast.
The initial accord aims at removing 15 MMBbl/d in total with help from outside OPEC plus Russia, but they would need help to get there. The G20 is holding an emergency energy summit on Friday, April 10, according to the Wall Street Journal. Based on pre-meeting rhetoric, OPEC and Russia are hoping, maybe demanding, that other nations like the U.S., Brazil, Norway, and the U.K., contribute to supply reductions. OPEC+ expects less than 5 MMBbl/d decline from outsiders (non-OPEC+ participants) at G20, according to Bloomberg.
Saudi Arabia is slated to curb output by about 4 MMBbl/d, while Russia has agreed to cut 2 MMBbl/d. After June, the entire group would reverse some supply cuts, backing off to 8 MMBbl/d of reductions through the rest of 2020.
OPEC’s own analysis of the market estimates a 6.8 MMBbl/d contraction in global oil demand for all of 2020, including close to 12 MMBbl/d for the second quarter. By some other analyst estimates, global oil demand may fall 35 MMBbl/d in total. The extreme amount of demand loss likely makes any coordinated supply-side solution only partially effective in the short term. However, less supply may help keep storage facilities within capacity limits.
With such a pullback in equipment in the field, a decline in production seems almost certain. For example, EIA’s Short-Term Energy Outlook (STEO) for March is suggesting sharp declines in both oil and gas production in the next year, and AEGIS notes NGLs would see similar percentage declines.
Recent losses in both rigs and frac crews were large. There had also been steady, but smaller declines in activity in the last year. And, we have not yet seen the bottom of this decline in drilling activity, in our view. Prices will have to provide support before we see activity stabilize.
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