Raymond James Energy Stat of the Week
by J. Marshall Adkins
Energy Stat: Lowering Late 2017 Rig Count, but 2018 Activity Still Poised to Surge
August 14, 2017
A near-term U.S. drilling activity slowdown appears inevitable, but the 2018 U.S. rig count is still set to move sharply higher, in our view. We see the current oilfield market as prime for a short-term rig count retracement given two major catalysts: 1) historically, the rig count lags WTI crude prices by 15-20 weeks (or 4-5 months) and crude prices started to fall about 4-5 months ago, and 2) E&P's have substantially outspent cash flows this year which is unsustainable without reduced drilling spending and/or higher oil prices. Accordingly, we expect about a 100 rig decline in the U.S. rig count over the coming months, before an oil price-driven surge in 2018.
Given the rig count outperformance in the first half of the year (relative our estimates), the lower year-end 2017 rig forecast still leaves us with an average 2017 rig count of 850 rigs. While U.S. oil production is responding to the increased activity this year, massive U.S. inventory drawdowns leave us convinced that the global oil market is meaningfully undersupplied and will remain so until oil prices rise meaningfully from current levels. That gives us confidence that rising oil prices over the next six months will drive rig activity sharply higher to average 1,100 rigs next year. The math is simple: If oil prices don't move higher, the U.S. rig count falls even further next year, U.S. oil supply growth slows, and global oil inventories fall to dangerously low levels. Put simply: we think oil prices and U.S. activity moves higher next year, the only question is timing.
This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.
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