By Sara Sjolin, MarketWatch
The number of active U.S. oil rigs have now risen for five straight weeks, and according to experts in the industry, there are no signs the ramp-up in production will abate anytime soon.
When asked what change they expect in the number of U.S rigs drilling for oil in the coming year, a majority of delegates at the S&P Global Platts Oil & Energy Forum on Monday said they expect the tally to have risen by February 2018.
The weekly Baker Hughes data out last Friday showed the number of active rigs rose by 6 to 597 last week, marking the highest level since October 2015.
At the Platts conference in London, 12% of attendees forecast a rise to above 1,500 rigs, while 45% predict a total of 1,000 to 1,499 active rigs. Another 40% see a level between 500 and 999, while only 3% said the count is likely to have slipped below 500.
“The main driver behind the rig count in the U.S. is essentially economics. Wells are getting cheaper to drill, break-even costs are going down, and the price of oil is going up,” said John-Laurent Tronche, team leader of Platts’s U.S. oil market unit.
“Everybody is going to look at the crude price as their indicator to whether it makes sense to drill a well or not. Obviously, if you can drill a well for cheaper than a year ago, that will make the decision a bit easier. But at the end of the day, all everybody is looking at is the price of oil,” he told MarketWatch on the sidelines of the forum.
Both West Texas Intermediate crude oil is and Brent have soared about 70% over the past 12 months, partly due to efforts by the Organization of the Petroleum Exporting Countries to stabilize the market.
In late November, the cartel agreed on a deal to cut production and convinced several non-OPEC members, including major oil producer Russia, to join the plan. The output agreement came into effect on Jan 1, and evidence suggests the signatories are sticking to their new production quotas.
However, the U.S. was never part of the arrangement. Instead of cutting production to combat the global supply glut, the country’s producers instead have quietly been sitting by, enjoying the OPEC-fueled bump in oil prices.
A rise in U.S. shale production has rekindled fears of a global supply glut, potentially sabotaging OPEC’s effort to balance the oil market.
“[U.S. production] represents one of the challenges that OPEC has in making its production deal a success,” said Herman Wang, who covers OPEC for Platts, in a panel debate at the London forum.
“The deal was aimed at putting forward the rise in prices, but a lot of members of OPEC — Saudi Arabia, in particular — are wary of prices actually getting too high,” he said.
“The assumption is that OPEC would love prices to go back high, but I don’t think that’s so true. I think they are very cognizant of the fact that if you get $60 or above, you could see the U.S. rig count exponentially rise and go too far up,” he added.
OPEC’s output-cap agreement is set to run until the end of June, but there’s already speculation that the gains in U.S. production will force the cartel to extend the accord. Gary Ross, head of global oil at PIRA Energy, said OPEC will struggle to realize its objective of balancing the market by the time the deal ends this summer, because global oil stocks are still too high.
“I think they probably have a desire not to continue the agreement, but they may be hard pressed to continue the agreement, given the facts on the ground,” he said.
OPEC meets on May 25 and could agree to extend the production deal at that meeting.