LONDON (Reuters) – The US oil industry likely passed the low point of the current cycle in July and August, with drilling rates set to start increasing from September or October and production from March or April 2021.
Since hitting a low at the end of April, when the coronavirus epidemic was raging and lockdowns were the most stringent, first-month U.S. oil futures prices have steadily increased over the past 19 weeks.
Over the past 30 years, futures price changes have typically been followed by drilling changes with an average delay of 4-5 months (15-20 weeks) and production changes with an overall delay of 9-12 month.
The delay between price changes and drilling may be explained by the time it takes for companies to re-evaluate drilling programs, outsource rigs, move them to the well site, install them, and start drilling.
Other delays in final production changes are due to the time required to reach target well depth, case harden and cement the well, fracture the formation, install wellhead equipment, test flow, connect the well collection systems and start commercial production.
Each well and cycle is slightly different, but over the past three decades, the cycles of futures prices, drilling rates, and production have followed one another in a standard sequence with fairly standard lags.
Given that oil prices hit a cyclical low 19 weeks ago, doubling in the meantime, it is very likely that drilling rates are now near or beyond their current cycle low (tmsnrt.rs / 3jQFqj9).
In fact, there were 180 oil rigs in the United States last week, down from a current cycle low of 172 two weeks earlier, according to oil services firm Baker Hughes.
The number of active oil rigs has been broadly stable for the past seven weeks, having plunged nearly 75% between mid-March and mid-July, which may indicate that the low point of the drilling cycle has been reached.
The number of rigs is expected to start increasing in the final months of the year, as the rise in oil prices since April begins to be reflected in business decisions and contracts.
In contrast, production is expected to continue declining for several months until the end of 2020 or early 2021 before rising again.
Natural declines will reduce production from wells that started producing before the outbreak, while the reduction in the rate of drilling since then means they will not be fully replaced.
Eventually, higher prices and higher drilling rates will result in new production to compensate for the loss of old production and total production will stabilize and start rising again.
The precise timing obviously depends on the price movement, but the most likely time frame for production to bottom out and increase is towards the end of the fourth quarter of 2020 or the first quarter of 2021.
The rise in prices since April is a signal that more drilling and more new wells will be needed to stabilize production and provide the necessary cash flow.
The fact that US oil futures have stabilized around $ 40 to $ 45 a barrel in recent weeks indicates that this range should stabilize production.
But if prices continue to climb to $ 50 or more, drilling will accelerate further, generating a larger increase in production from the second half of 2021.
– Oil prices are no longer particularly cheap after a strong recovery (Reuters, June 19)
– Oil prices are expected to be below $ 60 on average in the next cycle (Reuters, June 17)
– US oil production set to collapse as prices fall (Reuters, April 8)
– US oil production is expected to plunge as storage fills up (Reuters, April 1)
Edited by Elaine Hardcastle
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