Crude Economics
US Already Ready to Take Advantage of OPEC Cut

Don’t look now, but an American shale rebound is already underway. Operators have been steadily putting more oil rigs into operation for months now, and we’ve been seeing signs that the industry has been ready to stop a slide in output and start ramping up total U.S. production for months now. This week, as Reuters reports, the U.S. saw its rig count rise yet again:

Drillers added three oil rigs in the week to Dec. 2, bringing the total count up to 477, the most since January, but still below the 545 rigs seen a year ago, energy services firm Baker Hughes Inc said on Friday.

Since crude prices recovered from 13-year lows to around $50 a barrel in May, drillers have added a total of 161 oil rigs in 24 of the past 27 weeks, its biggest recovery since a global oil glut crushed the market over two years.

There’s a danger in taking too much away from these rig count numbers. As we noted a year and a half ago, when a decline in the U.S. rig count was being touted as evidence that the shale boom was going bust, the number of active rigs in operation is an imperfect metric by which to judge the health of the oil industry. The rigs that companies took offline in response to falling prices were necessarily those with the highest associated costs and the lowest productivity. Those rigs that were left were, therefore, the most efficient and productive available. Put a different way, the collapse in crude prices didn’t destroy America’s shale operators, it instead culled the herd.

We should also be cautious to read too much into the timing of these latest additions to the national rig count, as companies have not yet had time to respond to the sharp uptick in prices we saw on Wednesday as a result of OPEC’s (and Russia’s) decision to cut production. But while we can’t say that this is a direct effect of those cuts, we can reasonably expect the American shale industry to quickly respond to $50+ per barrel crude. Firms have been actively developing new processes and technologies that will allow them to become profitable at these levels in more plays than ever before, and thanks to the relatively small scale of shale well drilling, they’ll be able to adjust to a more bullish market with much more agility than more conventional oil producers.

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