Oil Setting Up For Another Leg Down

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Includes: PXD, USO, WPX
by: Mike Maher

Summary

The oil rig count rose for the first time in months last week.

Large US shale producers have been talking about adding more rigs.

$60 a barrel seems to be the new price ceiling.

Lat Friday, for the first time in 29 weeks, the Baker Hughs Rig Count showed an increase in the amount of oil focused drilling rigs last week. The increase of 12 rigs to 640 is statistical data that backs up anecdotal evidence from several operators who have been discussing putting rigs back to work after stacking hundreds of rigs over the last 6 months. Of the producers that have been discussing adding rigs back, Pioneer Natural Resources (NYSE:PXD) and WPX Energy (NYSE:WPX) have both been two of the most vocal.

WPX had said just two months ago that they would add drilling rigs back if oil prices were sustained at $65 a barrel. Then, last week, the company announced they were resuming completion work on previously drilled wells in the Williston Basin, and would add a second drilling rig in August, and a third in November. The decision to resume completions and begin to add drilling rigs is based upon increasing Williston type curves to 750 Mboe from 600 Mboe previously, as well as well costs that are down ~30% from 2014 levels. The company claims that the resumed and expanded activity in the Williston Basin will drive 20% volumes growth at the company in 2016.

On June 1, Pioneer Natural Resources announced that Enterprise Products Partners (NYSE:EPD) had agreed to purchase Pioneer's Eagle Ford Midstream assets. In the press release, Pioneer also announced that starting in July, the company would add 2 rigs per month to its northern Spraberry/Wolfcamp for the remainder of 2105. The addition of 12 rigs would more than double the amount of rigs Pioneer is currently running in that play, although it will not materially increase production growth in 2015 due to multi-well pad drilling.

While Pioneer and WPX are two companies that are putting out press releases to detail their plans to increase oil drilling, the Baker Hughs data shows that there are clearly other players who have decided that well costs have fallen far enough that $60 oil (NYSEARCA:USO) is an acceptable price to justify drilling and fracing new shale wells. This likely means that the $60 to $65 range will act as the current long term cap on rising oil prices, since prices in this range are adequate to coax companies to bring on new supply. As this new supply comes to market, and oilfield services costs continue to decline, it stands to reason that oil prices could be due to fall again, moving back towards the high $40s, and perhaps lower.

While the huge drop Monday July 6th was likely due to uncertainty over Greece and China, this could be the beginning of a move back towards the yearly lows for oil. Until investors see proof that oil production in the US is declining, expect that $60 price for WTI to be an upper limit on oil prices.

Disclosure: I am/we are long EPD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.