Rig count just one piece of energy’s economic picture

Rig Count

By: Mella McEwen – Midland Reporter-Telegram – For 80 years, the weekly rig count provided by the Baker Hughes service company has been used to gauge the financial health of the oil and gas industry.

But today that rig count may not be the most reliable barometer of the industry, according to a report just released by the data analytics company Enverus.

The rig count once was the most tangible piece of data regarding oil field activity, according to Rob McBride, senior director of strategy and analytics at the Austin-based company.

“(But) for how much production there is or will be the future, it’s not as reliable an indicator,” he said in a phone interview.

That’s because of the advances in drilling technology that have improved both efficiency and productivity, McBride said. The May rig count fell 670 rigs, or 66 percent, since March, implying a dramatic drop in output. But that statistic doesn’t offer insight into which wells have been shut in and taken offline, drilled but not completed, or pipeline data, for example, needed for a more complete picture, McBride said.

Having a more complete picture is impactful to anyone in the energy market — an oil and gas operator, an oil trader or energy consumer, he said.

“Whether it’s for speculation or business planning, they need a view of the future a day from now, a week from now, six months from now, a year from now,” McBride said. “They need to look at the entire forward curve to decide where and when they can make an economic rate of return,” he said. “They need a sense of what supply will be in the future, where demand will be.”

Having a more complete picture may prompt a buyer to wait a bit and tell a producer if he will have a market for his oil and natural gas, McBride said.

He offered as another example the fact that, alongside the drop in oil output is the loss of associated gas, which he said will result in a change for natural gas prices to meet U.S. demand, especially in the winter when demand peaks.

The market is rapidly changing, as evidenced by events in March, April and May, McBride said.

“What we know today will be different from what we knew yesterday,” he said.

The overriding influence on the market is the COVID-19 pandemic, he said.

“This event has no historical benchmark,” McBride stated. “We’re trying our best to see when demand will return, but there is no benchmark. We’ve never seen this in our lifetime, if ever

“I would call the market stable and hopeful. But I’m nervous about the data on the increasing case count in the pandemic. Right now, there’s no instance of the government shutting down the economy again, but if that happens, the oil price gains are at risk and the scenario of an extended recovery will be pushed backward.”

Should oil demand and prices recover enough to encourage some operators to bring production back online, he said other companies could follow suit and flood the market.

“The question is, how much do you want to start up, or do you wait and work through the inventory first?” McBride asked.

He predicted there will be a lot of volatility as each producer takes different action.
“There will be bursts of periods when supply is up and prices down,” he said. “From the smallest to the largest producer, each has a unique position, and depending on their capital, they’re in a position where they can wait or they can’t,” he said.

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