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Some growing physical limitations in the U.S. oil patch - especially in the booming Permian Basin - could put a cap on the ongoing domestic oil boom during the second half of 2018.
The DrillingInfo Daily Rig Count reached a peak for 2018 in the middle of the month, coming in at 1,105 on April 16. Since that time, the count has dropped by 20 rigs to its current level of 1085. With crude oil prices hovering near four-year highs, the U.S. Energy Information Administration (EIA) continuing to predict that the domestic industry will set all-time production records with each succeeding month, and OPEC and Russia pledging to continue their production limitation deal into 2019, we have reached the time of the year when the big independent producers re-evaluate the market and set their drilling budgets for the second half of the year.
So, have we seen this year's peak in drilling activity, or are these companies setting the stage to ramp things up even further during the last two quarters of 2018? It's a good question.
When we came to this same point in 2017, the industry had spent the first 4 months of the year dramatically increasing its rig count and overall production in response to a WTI oil price that had risen from around $43/bbl to above $50 in the final few months of 2016. That rapid price response had in turn caused the price for WTI to fall back into the mid-$40s as mid-year re-evaluation season dawned.
As a result, companies pulled back on their drilling budgets for the second half of the year, and cut them back even further during the fourth quarter of 2017 as investors demanded they focus more capital on investor returns than on drilling new wells.
Although the increase in the rig count thus far this year has not been nearly as dramatic as it was in 2017, the industry has created a very significant supply response to 2018's rising crude prices. The fact that the OPEC/Russia limitation agreement is hanging together and the global surplus appears to have dried up at this point create a very bullish atmosphere that agitates in favor of ramped-up drilling budgets for the second half of 2018.
But several big limiters to growth may put an artificial cap on how much expansion in drilling can ultimately come about:
- First, companies are finding it increasingly difficult to obtain the sand needed for their frac jobs, especially in the Permian Basin.
- Second, companies are finding it difficult to staff the growing number of frac crews needed to fully complete the wells they are drilling and place them on production. This is one of the main reasons why the EIA's inventory of drilled but uncompleted wells (DUCs) grew to an all-time high of 7,692 in mid-March.
- Third, despite the best efforts of midstream companies to construct a dozen new pipeline projects, Permian producers are beginning to see constraints on takeaway capacity for both oil and natural gas coming out of the basin.
- Fourth, just as happened in the Eagle Ford region when it was booming in 2010-2014, the road infrastructure in some parts of the Permian region are being strained to full capacity by all the truck traffic necessary to conduct oilfield operations. This is especially true in the relatively new but highly-attractive Delaware Basin in far West Texas. There is no quick fix available for this physical limiter to growth.
Thus, while current prevailing market forces agitate in favor of the industry's fulfilling the EIA's projections of new production records as far as the eye can see, we have a set of real-world physical constraints that will likely place at least a temporary ceiling on just how much higher domestic U.S. production can ultimately rise.
Taking all these factors into consideration, the best guess for the second half of the year favors an outlook for a slowly-rising rig count and more modest domestic production growth than some of the experts are anticipating.
