Impact of Oil and Gas Rig Cuts on Energy Prices

Rig Counts and Their Impact on Supply Levels

Rig counts significantly influence supply levels in the oil and gas sector. Companies like OXY and COP highlight that despite reducing rigs, they can still increase production through improved efficiency. Increased supply helps alleviate price pressures, demonstrating the critical balance between rig counts and energy prices.

"As we think about going from first quarter to the second quarter, which Sunil mentioned, quite a big step up in terms of production but even looking at first half versus second half in the Permian, the implied increase is about 18,000 barrels a day first half to second half and we're doing that while reducing rigs for -- in the Permian." --- (OXY, earning call, 2024/Q1)

"So we'll look at frac gaps and overall operating efficiency there. Do we drop a rig, go to 1 to 1.5 frac crews in there as an example as we further dig into it." --- (COP, event transcript, 2024/05/29)

"This growth in supply helps reduce rising price pressure, easing the impact on consumers and businesses." --- (XOM, event transcript, 2024/05/29)

"Similarly, Permian capital is weighted towards the first half of the year due to working interest variability and the desire to high grade rigs and increased utilization rates into the second half of the year." --- (OXY, earning call, 2024/Q1)

"Now on the operated side, we -- as we mentioned before, we are fairly flat on rig and frac crew counts, and that’s driven by that improved operating capital efficiencies and that we continue to realize through 2024, and we’ll have deflation capture. Now on the non-operated side, to your point, capital is higher as we’ve seen higher amount of Permian non-operated ballots than anticipated relative to the 2024 guidance given." --- (COP, earning call, 2024/Q2)

Production Cost Implications of Rig Cuts

Rig cuts lead to lower exploration budgets and reduced rig counts, which in turn decrease production capacity and revenue. As rigs are reintroduced, operational costs are expected to rise, indicating that the implications of rig cuts may ultimately result in higher production costs.

"Yes, Brent prices still averaged $85 per barrel with support from the extension of OPEC+ production cuts, rising geopolitical risk, and firming oil demand in June." --- (BKR, earning call, 2024/Q2)

"Lower oil and natural gas prices usually translate into lower exploration and production budgets and lower rig count, while the opposite is usually true for higher oil and natural gas prices." --- (HAL, sec filing, 2024/Q1)

"North America revenue decreased 6% year-on-year, primarily due to lower rig count in U.S. land and the effect of lower gas pricing which impacted our APS project in Canada." --- (SLB, earning call, 2024/Q1)

"And as the industry looks to put more and more rigs back to work, the cost per rig is going up." --- (NOV, earning call, 2024/Q2)

"In OFSE, on the back of slowing global demand growth and ongoing economic uncertainty, the recent Organization of the Petroleum Exporting Countries production cut extension, coupled with rising geopolitical risks and firming oil demand in June 2024 have helped to keep global oil markets more balanced." --- (BKR, sec filing, 2024/Q1)

Geopolitical Influences on Energy Prices

Geopolitical factors significantly influence energy prices, as highlighted by executives from EOG and BP. They emphasize that rising global GDP and ongoing demand for oil and gas, driven by economic growth and geopolitical stability, will shape future energy markets despite rig cuts.

"At the same time, I think you see just in the last couple of years with some of the geopolitical activity driving up oil price, you kind of see the higher end." --- (EOG, conference, 2024/05/29)

"And as the population grows and we see economic growth, energy that is safe, reliable, sustainable, and affordable will very much be needed. While forecasts vary, virtually everyone agrees that oil and gas will remain a part of the energy mix well into the future." --- (ENB, event transcript, 2024/05/08)

"So it does have some impact Biraj. But I think the big picture story here is the growth in global GDP over the next 25 years and with it, the growth in energy demand over the next 25 years is far more dominated by increasing prosperity, not by increasing people. So essentially, economic growth has to have 1 or 2 things, either more people or those people become more productive." --- (BP, event transcript, 2024/07/10)

"And then in addition to that, as you look at the back half of the decade, I think on the last earnings call, we highlighted our forecast for potentially another 10 to 12 Bcf a day of demand increasing from things like electricity generation, coal power plant retirements, just an increase in Mexico exports and then finally, just overall industrial demand growth." --- (EOG, earning call, 2024/Q2)

"Assumptions regarding the expected supply of and demand for crude oil, natural gas, natural gas liquids, liquefied natural gas and renewable energy, and the prices of these commodities, are material to and underlie all forward-looking statements, as they may impact current and future levels of demand for the Company's services." --- (ENB, press release, 2024/04/01)

Market Sentiment and Investor Reactions

Market sentiment is mixed regarding oil and gas rig cuts. While some executives highlight the need for investment in traditional energy to meet rising demand, others express concerns that reducing production could harm shareholder value. Overall, the industry is adjusting to supply changes, with a focus on balancing domestic and international markets.

"And frankly, if you look at the LNG market. And when you're building large LNG projects, you tend to sell those out and sign contracts in advance of the investments, which the market today is linked to oil." --- (XOM, earning call, 2024/Q2)

"It's an economy that is large and demand continues to go up. That said, the policy environment has been one that is geared towards reducing investment in traditional energy, encouraging investments in these lower-carbon energies." --- (CVX, earning call, 2024/Q1)

"But as the markets adjust to less domestic supply and more international supply, which will come in and ensure the market remains balanced, so timing of ships and imports into the market may cause some volatility from time to time, as we saw recently with the oversupply, Paul." --- (PSX, earning call, 2024/Q2)

"On the contrary, Mr. Sheffield focused on legitimate topics such as investor feedback on independent oil and gas company growth and capital reinvestment frameworks; unfair foreign practices that threatened to undermine U.S. energy security; and, through dialogue with government officials, the need to sustain a resilient, competitive and economically vibrant oil and gas industry in the United States." --- (XOM, press release, 2024/05/02)

"Both pads will destroy shareholder value. Reducing hydrocarbon production directly contradicts the growing global demand for oil and gas, which is an opportunity for ExxonMobil to leverage its expertise and resources in the energy sector to generate shareholder value." --- (XOM, event transcript, 2024/05/29)

Short-term Price Volatility from Rig Cuts

Short-term price volatility in energy markets is influenced by rig cuts, as companies like Devon Energy reduce activity in response to commodity price fluctuations. Northern Oil and Gas highlights that drilling costs and competition also contribute to this volatility, reflecting a complex interplay between supply and market conditions.

"The cost of drilling wells can vary significantly, driven in part by volatility in commodity prices that can substantially impact the level of drilling activity." --- (NOG, sec filing, 2024/Q1)

"As we look to the rest of 2024, we're reducing activity to 2 rigs in our Dow JV area and intend to bring online the majority of the activity in the second half of the year to capture the higher gas price expected in the winter months." --- (DVN, earning call, 2024/Q1)

"You've got the smaller competition coming in with the bullish view on oil pricing, which creates some volatility in terms of the ground gain, what I'd say, I mean even just looking at some of our April activity as we've been making some pretty strong headway in that regard, being able to pick things up across all three of our respected basins." --- (NOG, earning call, 2024/Q1)

"On the Anadarko, good to see a slowdown in the drill bit capital here. It sounds like dropping down to two rigs given the commodity price environment." --- (DVN, earning call, 2024/Q1)

"The lower average realized price in the first six months of 2024 as compared to the same period in 2023 was driven by a $1.06 per Mcf (or 30%) decrease in realized natural gas and NGL prices, excluding the effect of settled commodity derivatives, and a higher average oil price differential." --- (NOG, sec filing, 2024/Q2)

Historical Trends in Rig Cuts and Price Movements

Historical trends show that rig cuts directly influence energy prices, with the Permian Basin demonstrating resilience in service costs despite varying activity levels. Additionally, geopolitical factors and OPEC+ production cuts have contributed to price stability, while reduced rig activity in regions like Haynesville signals potential declines in production and pricing.

"And it really varied kind of basin to basin based on activity levels. And the Permian, I would say, definitely had the most resilient pricing for service costs since ahead like over half of the rig activity." --- (EOG, earning call, 2024/Q2)

"Crude prices increased slightly during the second quarter despite volatility driven by geopolitical events and extension of voluntary OPEC+ production cuts." --- (CVX, sec filing, 2024/Q2)

"Gas production will decline with only one rig running in the Haynesville, but given where our prices are right now, that's fine." --- (BP, earning call, 2024/Q2)

"ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Second quarter crude prices were essentially unchanged versus the first quarter, near the middle of the 10-year historical range (2010-2019), as the market remains relatively balanced." --- (XOM, sec filing, 2024/Q2)

"I just wanted to get a sense, are you pretty much committed to kind of the 1 rig this year, it sounds like you want to get the wells drilled, but is there a potential to maybe defer some of those turn in lines or maybe choke back some of those volumes until later this year, just based on the weak current pricing." --- (EOG, earning call, 2024/Q2)