Capitulation by Light Tight Oil Operators as Rig Count Continues Its Descent

Capitulation by Light Tight Oil Operators as Rig Count Continues Its Descent

24th March 2016

The onshore rig count saw a significant decline this week, down 13 (3%).  In the three key oil basins (Eagle Ford, Permian, and Williston) there were 8 fewer oil rigs, answering the question as to whether last week was the bottom.  (Answer: not yet.)

The oil industry is in its deepest downturn on record and this has made it impossible for most light tight oil (LTO) operators to remain profitable.  Oil prices, even after a rebound in recent weeks, are still down ~60% from the pre-cash peak in June 2014.

The major difference today compared to previous industry downturns is that this downturn is not driven by a decline in demand.  It is instead a consequence of an increase in supply, which is the direct result of OPEC’s decision to protect its market share rather than oil price.  We are therefore unlikely to see oil prices return to the US$100 level.

The shift in OPEC’s strategy is likely to have deep and long lasting consequences for the industry.The current downturn has now lasted for 17 months and has seen oil rig count for the three key U.S. oil basins crash from a peak of 955 in October 2014 to just 219 today, a ~78% drop. With a price disruption beyond the industry’s expectation, LTO operators are now in a full-scale liquidity crunch.

GCA’s analysis indicates that the rig decline could continue into late 2016, at which time rig activity would largely be focused on the LTO resource areas that are economic at oil prices below US$50. Demise of LTO rig activity to this level would bring U.S. production (as GCA forecast in the December 2015 Monitor) to ~8.3 million barrels per day by the end of 2016, down 1.2 million barrels per day from a peak of ~9.5 million barrels per day in September 2015.

As spot prices of crude rallied from the 12-year lows touched in mid-February, turnover in long-dated oil contracts has soared to record highs, as LTO producers started to lock in prices in the US$40s to maintain minimum rig activity levels in 2016-2017.

Sources: Baker Hughes Weekly Rig Report,, and GCA Analysis

Weekly Recaps

Drilling Activity

The total number of active onshore rigs now stands at 436, down 1,440 (~77%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total decreased to 219 (down 8 last week), with Eagle Ford down 3, Williston flat, and Permian down 5.  The horizontal rig count is now 359, down 10 last week.

Total U.S. rig count (including the Gulf of Mexico) stands at 464, down 12 last week, with rigs targeting oil down 15 for a 30-week total decline of 302.   The average weekly decline rate now stands at ~10 rigs per week.

Oil Price

Oil price declines were triggered by a report from the U.S. Energy Information Administration (EIA) showing an unexpectedly large build in domestic crude oil inventories, a sign that there has not yet been a demand for the additional 300,000 barrels per day of Iranian crude in the market.

Brent, the global benchmark for oil, was down US$2.26 to US$39.77 a barrel, reflecting a loss of 5% on the week.

WTI crude slid US$1.61 to US$38.75 a barrel, down 4% on the week.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged just below 16 million barrels per day, with refineries at 88.4% of their operating capacity last week.

On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 20,000 barrels per day, with total production at 8.531 million barrels per day.  The past nine-week decline total stands at 197,000 barrels per day (an average of ~22,000 barrels per week).  The data continue to confirm that U.S. LTO production is diminishing at current oil rig activity.

U.S. crude imports averaged 8.4 million barrels per day last week, an increase of 691,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, ~12% above the same four-week period last year.

Crude oil inventories increased ~9.4 million barrels from the previous week and persist at historically high levels.  Crude in storage at Cushing (the main price point for WTI) deceased 1.3 million barrels, taking the total crude in storage to 66.2 million barrels (~91% utilization of working storage).

Sources: EIA Weekly Update and GCA Analysis


Capitulation by Light Tight Oil Operators as Rig Count Continues Its Descent

P Kevin Galvin

Facilities/Cost Engineer -
Capitulation by Light Tight Oil Operators as Rig Count Continues Its Descent

Jeanne-Mey Sun

Vice President and Global Head of Business Consulting -
Capitulation by Light Tight Oil Operators as Rig Count Continues Its Descent

Bob George

Global General Manager -

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