2016 – The Start of the Recovery

2016 – The Start of the Recovery

The year of 2016 saw what many believe to be the bottom of the downturn regarding the domestic oil and gas industry. In 2016 the industry realized recent historical lows of both the price of WTI (West Texas Intermediate) of slightly above $26/bbl. in February, and the U.S land drilling count bottoming at 374 rigs in May. This was brought on by the macro event of approximately 2 million barrels of crude produced daily worldwide above the worldwide demand resulting in a surplus that definitely had a negative impact on the price of WTI. A second macro event was the decision of OPEC not to cut production as it had historically done in an effort to shore up crude pricing. As the price of oil fell approximately 80% from the high in 2014, the rig count dropped from a level of 1,784 on January 1, 2015, to 672 on January 1, 2016.

This precipitous drop in the price of WTI resulted domestically in marked down-sizing of personnel across all phases of upstream operations with a number of E&P and oilfield service companies forced into bankruptcy. Many projects were either cancelled or delayed indefinitely and one result was billions of dollars of capital equipment was idled. A positive aspect was the industry adjustment to the market conditions by discovering and implementing efficiencies that allowed continued production in certain basins. These efficiencies coupled with at least a 30% reduction in rates charged by the service companies resulted in continued drilling, but at a much slower rate. This slowdown led to a decrease in daily domestic crude production which was one of the primary reasons that OPEC declined to cut its production.

In the 4th quarter, OPEC elected to change its policy and decided to cut production by 1.2 million bbls./day commencing in January 2017. Further, certain non-OPEC exporters agreed to join OPEC and cut production an additional 600,000 bbls./day. This news had an immediate positive impact on the price of WTI pushing it above the $50/bbl. level. This further resulted in an increase of domestic land drilling rigs which ended 2016 at 634, just 38 rigs below its 2016 starting level.

As we enter 2017, Hutchison Hayes believes that the recovery will continue in a positive direction as the domestic industry is stronger in many ways and certainly leaner. The continued recovery will face challenges in 2017, such as, U.S. production increase due to higher WTI prices offsetting the OPEC and non-OPEC cuts, and the reality that the flight of expertise from the industry in 2015 and 2016 will be an issue.   

2017 Starts with OPEC Complying to Planned Product...
OPEC Initiates Production Cuts