Numerous stories have been dished out covering the continuous rig count depletion happening across the nation. But while reducing oil rigs may have helped boost oil prices over the past month or so, it will do little to nothing in slowing production or alleviating the oil glut on the market, according to analysis from Goldman Sachs.
“Our bottom-up analysis suggests that the decline in the US rig count likely remains well short of the level required to slow US shale oil production to levels consistent with a balanced global market, especially if productivity gains and high-grading materialize as expected,” Goldman Sachs stated in a press release Tuesday. “Nonetheless, we also find that the rebalancing of the US oil market is closer than would be implied by the US shale gas template of 2012-13.”
Additionally, the analysis suggests that the issue really isn’t how many rigs are being cut, but which ones are leaving the production scene. A recent CNBC report stated that “high-grading,” with producers eliminating the least efficient rigs first, will keep production consistent. It is estimated that the Big-three plays (Eagle Ford, Permian and the Bakken) would need to cut their horizontal rig count by another 30 percent to 407 by the fourth quarter of 2015 to bring production growth to 400,000 barrels a day by then. Presently, it is expected that the current rig count will bring production growth from the Big-three shale basins to 615,000 barrels a day in the fourth quarter of this year, while continued productivity growth may push that as high as 690,000 barrels a day.
If you’re still not convinced oil production isn’t safe, hear this: investment in drilling rigs and wells actually improved in the closing months of 2014. According to Bloomberg Business, outlays for rigs and wells climbed at an 8.9 percent pace in the fourth quarter after an 8.3 percent increase from July through September. Although this is a slowdown when compared to the beginning of 2014, where spending reached as slightly over 25 percent in the second quarter, it’s hardly a standstill in production investments.
Make no mistake of the obvious signs of the energy market being constricted. Jobs are being slashed and budgets are being tightened. But companies are holding on. Production businesses are becoming more efficient with their ventures which is unfortunately happening at the expense of the blue collar worker. But this is all a reaction to barrel price in order to sustain production growth.