- Oil prices have declined in the last three months as US oil production continued to surprise following persistent US oil rig count increases.
- US oil rig count seems to have slowed down as indicated by last week’s small drop. Where does it go from here?
- More importantly, however, I discuss in this article how global oil rig count has evolved recently and what the recent trend may mean for global oil supply in 2H17.
Overview of recent events
There has been much excitement around the booming shale oil production, which has boosted oil production in the United States from 5.5 million barrels per day (“mbd”) in mid-2011 to more than 9.6 mbd in mid-2015. Threatened by the unprecedented growth from American producers, Organization of Petroleum Exporting Countries (“OPEC”) decided in November 2014 to abandon its “swing-producer” role and instead quickly ramped up its own production in order to lower prices, drive higher cost shale oil producers out of the market, and protect its market share. As the following graph shows (source: Peak Oil Barrel), OPEC drastically boosted its collective production by more than 3.0 mbd from November 2014 to November 2016.
OPEC’s production growth created a large glut of oil that sank oil prices from more than $100 per barrel to less than $30 per barrel in a little more than a year.Notice in the graph above the large drop of nearly 1.4 mbd from November 2015 to January 2016, or 1.2 mbd from October 2015. This is because on November 30, 2016, OPEC reversed its previous decision to pump as much oil as they can, and reclaimed the role of a swing producer by capping its collective production at a level they believe will reduce global inventories and rebalance the oil market. Oil prices quickly responded by a jump of nearly $10 per barrel. A week later, OPEC was able to get a number of non-OPEC countries (“NOPEC”) including Russia to join its efforts to limit oil supply for the first time since 2001.