The impact of rising crude oil prices on North American light tight oil (LTO) production is said to be a “Catch 22”, the title of Joseph Heller’s popular 1961 novel set in World War II. The premise was you could get out of the army if you were crazy, but you weren’t crazy to try to get out of the army. So this avenue to escape the war didn’t work for the book’s main character John Yossarian.
Too many analysts continue to believe drilling and service has the same problem with rising oil prices. With West Texas Intermediate back above $50 a barrel – at least briefly last week – North American LTO developers are putting rigs, service equipment and personnel back to work. The so-called “fraclog” or “DUC” inventory (wells drilled but uncompleted) is being reduced. While this is good, it is also thought by some to be temporary.
Those who study crude prices have correctly observed it was the four million barrels per day increase in U.S. LTO production that contributed greatly to the 2014 oil price collapse. So if the price of oil is now high enough to make LTO economic again, some believe the reward will either be a cap on further price increases or the foundation of the next collapse. The Catch 22 is if oil prices rise high enough to put drilling and service back to work, then it won’t last long.
To this writer the most meaningless indicator of the future of world oil prices has been the weekly U.S. oil rig count published by Baker Hughes and opined upon regularly by oil analysts and writers since late 2014. That’s when it became an important world oil price driver for the first time. The argument emerged that having contributed to the collapse of world oil prices, U.S. LTO was the new global “swing producer”, replacing Organization of the Petroleum Exporting Countries leader Saudi Arabia in that role. If and when prices rose the U.S. rig count would rise and ultimately cause prices to fall again. If prices went too low, the LTO operators couldn’t afford to drill, which would shrink supply and cause prices to rise.