Over the last several months (and right up to today) some of the headlines published in various media outlets have addressed the slower-than-expected response of operators to increase drilling activity as oil prices have risen. This appears to be consistent with the expectations of their equity investors and the realities of the tougher underwriting standards in the debt markets. Let’s look back at recent oil price spikes to compare the current rig count response to earlier ones.
The graph below shows the average monthly WTI spot price and the average monthly North American oil-directed rig count from August 1987 to January 2022. The data are from the U.S. Energy Information Administration (EIA) and Baker Hughes, and the rig count has been shifted backward five months to account for the typical lag in the rig count response.
I’ve highlighted a few areas of the history.
Oil prices at the current levels are something of an outlier and it seems reasonable to expect a supply response. The big question is: who will make it? OPEC+ or U.S. operators? Investor expectations are only part of the reason for the slow response. U.S. labor markets are tight, many workers are wary of returning to the upstream business after the last downturn, and even frac sand is in tight supply. My expectation is that the U.S. industry will respond, but more slowly than in the past, until capital and other constraints are resolved.
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