U.S. Production Not Responding To Higher Oil Prices...Yet

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Includes: BNO, DBO, DIG, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Bespoke Investment Group

At the peak for drilling activity in the United States, Baker-Hughes tallied 1,609 rigs operating in the US. As of today's report, that number is down to 332, a fresh low, despite a huge uptick in prices since the low back in February. Spot WTI prices rose from $26.19 on February 11th to $45.83 today. But that 86% gain in prices has not yet led to an increase in production.

Below we chart weekly data on US production from the Department of Energy's Information Agency, quoted in millions of barrels per day. Weekly numbers can be pretty unreliable, so we've included monthly numbers as well. As shown, weeklies are making new lows and it looks likely the monthly figures will continue to do so as well. We've also included a chart of rig counts.

As shown, rigs peaked and began to roll over in October of 2014, 7 months before monthly production peaked and almost 9 months before weekly production peaked. While soaring rates of productivity have made a big difference for the shale patch (more production from fewer rigs), it's unlikely that we'll see a material bounce in crude output without an uptick in rigs. In June of 2015, we saw a minor uptick in rigs. 4 months later weekly production numbers ticked up although monthlies were also slightly higher in short order.

While a few incremental rigs could make a big impact on production in a very short period of time, our larger point is that it's going to be very hard to boost production without boosting rigs, and despite a nearly constant 3-month rally in crude prices we haven't seen those rigs come on line; in fact, quite the opposite.