The big rally in oil is slowing down on renewed worries of weakening demand.
Oil prices are starting the week lower on weak Chinese industrial production data and talk from Iran that they have no plans to freeze production until they raise production to 4.0 million barrels a day. Based on the disappointing return of Iranian production, it could take years for them to get back to 4.0 million barrels a day.
This comes after a week where we saw the total energy rig count fall to the lowest level since the 1860s. The total count of oil and gas rigs fell by nine to 480. The oil rig count from driller Baker Hughes fell by six to 386, which was the 12th straight week of declines in oil rigs and the lowest level since the week of Dec. 4, 2009.
Oil also is weak because there are demand concerns after China’s industrial production grew at a less than expected 5.4% in January and February when compared with a year earlier, down from December’s 5.9% reading which suggests slowing. Retail sales in China also slowed to 10.2% growth in the two-month period, less than December’s 11.1% increase.
The Wall Street Journal though warns that the, "Oil-Price Rise Could Be Its Own Undoing." The Journal reports that some analysts say as soon as prices go up, the shale producers will bring production back on line and drive prices down like they did last year, perhaps not learning from what happened last year.
The Journal cites Chief Executive John Watson telling analysts, “Cost reductions now allow companies to increase production at even lower prices. Chevron Corp. could drill 4,000 wells in the Permian basin in Texas that would make money at prices below $50 a barrel, and some of those would make money below $30."
Chevron has 16 rigs in the region, drilling wells that will come online in six to 12 months. “We think that those wells that are being drilled will be economic at the kinds of low prices that we’re seeing today,” he said.
Market Watch reports that, “U.S shale producers have hundreds of drilled but uncompleted wells, called DUCs. Taking a DUC to completion took an average of 10 days during 2015, according to NavPort, which collates oil well and rig data using regulatory reports.
“While each basin has a significant amount of DUCs, location is going to come into play when operators are deciding to frack the well—basins with the highest average initial BOE [barrel of oil equivalent] return should result in operators holding onto DUCs for longer periods of time, in hopes to get the biggest bang for their buck,” according to Amie Parenti, NavPort’s director of analysis services.
In an interview Friday, Parenti said the number of drilled but uncompleted wells in all basins held by reporting companies had grown by 34% during 2015. Parenti provided lists showing the top 10 reporting exploration and production companies among the four shale basins with the largest number of drilled but uncompleted wells.
To be sure, we don’t know if we’re already in the middle of a sustained, significant rise in oil prices. Despite gains in the past month, West Texas Intermediate crude oil was up only 2% year-to-date through Tuesday.
There’s no way of knowing how long a company will need to wait (or survive) to maximize its profit when completing the DUCs. This is why we added another column to the data for publicly traded companies: ratios of long-term debt to equity as of Dec. 31. Unlikely stock market winners: oil companies with little debt DUCs by basin.
The data supplied by NavPort includes average BOE per well produced for each reporting producer in the specific basin within the first six months after fracking is completed. It also includes an efficiency measure, dividing that average production figure by proppant short ton.
Proppant is the combination of water, sand and chemical additives pumped into a well under pressure to open cracks in the shale from which oil and gas can flow. It represents a major portion of the total cost to bring a well to production.
Here are the lists of the top 10 producers in the four basins with the largest number of drilled but uncompleted wells (DUCs). The list is sorted by average barrel of oil equivalent (BOE) during the first six months of production per proppant short ton used:
Oil prices are still getting support from booming U.S. gasoline demand. Demand should continue to be strong as weather is starting to become more mild! Look to buy breaks as refiners are going into maintenance and cutting runs.