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February 24, 2015

U.S. Shale Bust Deepens with No Relief In Sight

By Wolf Richter at Wolf Street

The fracking bust that is following the phenomenal fracking boom is deepening relentlessly, week after week, and there is still no respite in sight.

Drilling activity peaked in October last year, when 1,606 rigs were drilling for oil, with a four-month lag behind oil prices. But by October it was clear that the oil-price plunge wasn’t a blip, and in November oil fell off the chart. It was then that the industry reacted with vertigo-inducing rapidity. And the number of rigs drilling for oil, which Baker Hughes publishes every Friday, began to plummet.

In the latest reporting week reported Friday, drillers idled an additional 34 oil rigs. Now only 1,019 rigs are still drilling for oil, down 590 rigs from the October peak, a 37% plunge in 19 weeks. The steepest rig-count plunge in the data series.

But drillers have to service their mountain of debt with which the fracking boom was funded. 

They can’t afford to cut production. To stay alive, they cut operating cost and capital expenditures, and they’re laying people off. But they focus their remaining resources on the most productive plays, using the most efficient technologies, with a single-minded focus on raising production while spending less.

The hope is that this strategy will get them through the oil bust if it doesn’t last too long. But because everyone is thinking in those terms, US production overall continues to rise – it averaged an estimated 9.2 million barrels per day in January.

Given lackluster demand, crude oil inventories are piling up into record territory. Excluding the Strategic Petroleum Reserve, they rose by another 7.7 million barrels last week to 425.6 million barrels, according to the Energy Information Administration. The highest level in the weekly data going back to 1982. Oil inventories are now 63.3 million barrels, or 17.5%, above the already high inventories at the same time last year.

The surging trajectory of those crude oil stocks has been making a mockery of the 5-year range (gray) and seasonal fluctuations:
Apparently, due to numerous recent changes, there is no clear picture of how large storage capacity for crude oil in the US actually is, and when the US will run out of storage. But the topic is beginning to weave through conversations.

On the natural gas side, drillers idled another 11 rigs. Only 289 gas rigs are still actively drilling for natural gas, the lowest since May 1993. The rig count has crashed 81% since its peak in 2008, and yet production of natural gas – which is also a byproduct of oil wells – has been setting new records on a weekly basis. Fracking has turned the US into the largest natural gas producer in the world, despite the fact that the rig count has been crashing for years:

The plummeting oil rig count was supposed to curtail oil production, and lower production would bring supply and demand into balance and allow the price of oil to recover. But the opposite is happening. Conundrum? Hardly. And it will get worse. Devon Energy Corp. just told us why. Read…  The Chilling Thing Devon Energy Just Said About the US Oil Glut

Courtesy Wolf Richter at WolfStreet.com (EconMatters archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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