Frac Activity, Rig Count Signal Production Slowdown Is Imminent

April 10, 2020April 22nd, 2020
Share
Print Friendly, PDF & Email

Two measures of industry activity show that there are fewer wells being drilled and much fewer wells being completed now versus earlier this year and a year ago.

The chart below shows the number of oil-directed drilling rigs per Baker Hughes and frac crews (aka frac spreads) per data provider Primary Vision. This week, the number of oil-directed rigs fell by 58, or over 10%, to reach 504 deployed. Last week alone. This week, it had also fallen almost 10%.

But another metric might mean more for the number of new wells in the near term: The number of frac crews fell to its lowest reading since the 2016 downturn, at 185. In each of the last two weeks, the Frac Spread Count dropped 30. It was a one-week drop of 30, and it is only half what it was in 4Q2019. In mid-November 2019, that count had been twice as high, at 377.

Taking the rig count and the frac count together, it means that both the number of new wells being drilled and the number completed are likely falling fast.

Two weeks of massive declines

The initial accord aims at removing 15 MMBbl/d in total with help from outside OPEC plus Russia, but they would need help to get there. The G20 is holding an emergency energy summit on Friday, April 10, according to the Wall Street Journal. Based on pre-meeting rhetoric, OPEC and Russia are hoping, maybe demanding, that other nations like the U.S., Brazil, Norway, and the U.K., contribute to supply reductions. OPEC+ expects less than 5 MMBbl/d decline from outsiders (non-OPEC+ participants) at G20, according to Bloomberg.

Saudi Arabia is slated to curb output by about 4 MMBbl/d, while Russia has agreed to cut 2 MMBbl/d. After June, the entire group would reverse some supply cuts, backing off to 8 MMBbl/d of reductions through the rest of 2020.

OPEC’s own analysis of the market estimates a 6.8 MMBbl/d contraction in global oil demand for all of 2020, including close to 12 MMBbl/d for the second quarter. By some other analyst estimates, global oil demand may fall 35 MMBbl/d in total. The extreme amount of demand loss likely makes any coordinated supply-side solution only partially effective in the short term. However, less supply may help keep storage facilities within capacity limits.

With such a pullback in equipment in the field, a decline in production seems almost certain. For example, EIA’s Short-Term Energy Outlook (STEO) for March is suggesting sharp declines in both oil and gas production in the next year, and AEGIS notes NGLs would see similar percentage declines.

Recent losses in both rigs and frac crews were large. There had also been steady, but smaller declines in activity in the last year. And, we have not yet seen the bottom of this decline in drilling activity, in our view. Prices will have to provide support before we see activity stabilize.

We continue to monitor oil, gas, NGLs, and regional markets for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact info@aegis-energy.com. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at view@aegis-energy.com

Back to AEGIS Market Summary beta blog

NOTICE: The content of this report is provided for information purposes only and has been prepared to describe current trends in the commodities markets. This information does not constitute either investment or hedging advice and is intended only for AEGIS clients. If you are not the intended recipient of this report, then you may not disclose, print, copy or disseminate this information. Otherwise, if you have received this transmission in error, then please notify the sender and delete the report.

Access Our Deeper Market Insights

Product Factor Matrix

Proprietary view of priced-in factors driving the market vs. potential bullish and bearish surprises.

Learn More

Trading Recommendations

Clear trading recommendations based on real market opportunities that enable clients to take action.

Learn More

Market Data

A comprehensive suite of the latest curves, spot pricing, settles, and strips to drive confident hedging decisions.

Learn More

Benchmarking and Trade Analytics

Real-time access to analyze your hedging strategy against AEGIS benchmarks and current market activity.

Learn More