U.S. oil drillers cut rigs this week for a 20th week this year after three weeks of additions, according to a closely followed report on Friday, as crude prices pull back after a recent rally to an 11-month high over $51 a barrel.
Despite a decline in U.S. crude to below $48 a barrel on Friday after Britain voted to leave the European Union, several companies said recently they plan to boost spending on new drilling with futures for the balance of the year and 2017 topping $50 a barrel.
Analysts and producers have said U.S. crude prices over $50 was a key level that would trigger a return to the well pad. Drillers removed seven oil rigs in the week to June 24, bringing the total rig count down to 330, compared with 628 a year ago, Baker Hughes.
Before this week, drillers added oil rigs in only four out of 24 weeks this year, cutting on average eight rigs per week for a total of 199. Last year, they cut 18 rigs per week on average for a total of 963, the biggest decline since at least 1988. Analysts, however, expect the rig count to climb in most weeks for the rest of this year with prices expected to rise in prices months. Looking forward, futures for the balance of the year were trading below $49 while calendar 2017 was nearly at $51.
To capture those rising prices, several producers in recent weeks said they plan to spend more money on new drilling and the completion of already drilled wells to boost output, including Devon Energy Corp, Pioneer Natural Resources Co and Energen Corp. “We expect rig counts to keep rising into year-end as prices rise, but the backlog of drilled-but-uncompleted wells (DUCs) could slow the pick-up in drilling as producers potentially look to reduce the backlog of DUCs before adding rigs,” analysts at U.S. bank Citigroup said in a report. Citi said production from DUCs is crucial to production growth, noting it expects oil and natural gas production to respectively fall by 760,000 barrels per day and 1 billion cubic feet per day in 2016 versus 2015 and 160,000 bpd and 3.5 bcfd in 2017.
But with DUCs being completed, Citi forecast production might only decline by about 600,000 bpd for oil and even rise by 0.1 bcfd for gas in 2016, and rise by 160,000 bpd for oil and 1.2 bcfd for gas in 2017. Simmons & Co, energy specialists at U.S. investment bank Piper Jaffray, expect the number of oil rigs to increase in the third quarter with about four rigs added per week in the second half of 2016, four to five per week in the first half of 2017, five per week in the second half of 2017 and seven per week in 2018.