Rigs and Spreads Nov. 3: The light in the tunnel was a train after all

  • After three weeks of modest gains, rig counts have resumed their decline, giving back all their gains in just this past week

  • Rig counts

    • Total oil rig counts: -8 to 496

    • Horizontal oil rig counts: -8 to 443

    • The Permian horizontal oil rig count: -4

    • The Canadian horizontal oil rig count saw progress this week, +1 to 120, but still is 16 below this week last year

  • The US horizontal oil rig count is falling at a pace of -0.5 / week on a 4 wma basis.

    • This number has been negative for 46 of the last 48 weeks

  • Frac spreads fell, -5 to 270  

    • As last week, there is a stark mismatch between rigs and spreads, with DUC inventory, as measured in days of turnover, falling to a nine-year low of 13.6 weeks

  • The rig / spread relationship remains highly unstable

    • To attain stability in the DUC count, rigs must either rise by 83 or spreads must fall by 42.  

    • Given that rig counts are falling at an implied WTI price above $90 / barrel, a rapid roll-off of spreads seems likely at some point

  • Interestingly, the Brent Spread (Brent – WTI) opened back up to $4+ / barrel in the last two weeks

    • An open spread has implied US production growing faster than Brent zone production, compelling US operators to offer a modest discount to place incremental barrels in the market

    • Historically, this spread is associated with US production growth around 400 – 600 kbpd / year

    • If that remains true, then EIA pessimism on US short-term C+C growth is misplaced