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U.S Rigs Continue to Rise Post OPEC Deal: What to Expect?

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After the Organization of Petroleum Exporting Countries (or OPEC) agreed on production cut last Wednesday, oil prices have started improving again. Energy investors are undoubtedly pleased with the cartel’s announcement as the commodity market is already flooded with plentiful supply of crude.

However, we note that U.S energy players have increased oil rig counts last week, even after OPEC’s decision. In fact, the rig count has been increasing for the last five weeks consecutively. It clearly indicates that shale players have started to gather to the oil patches when the major crude producers, including OPEC members and Russia, are expected to curtail their output. 

OPEC to Cut Production

Interestingly, this is the first time since 2008 that OPEC has signed a deal to cut oil production. No doubt this is the most crucial move in the energy sector this year to restore crude prices. In fact, oil has started to recover with West Texas Intermediate (WTI) crude currently trading above $50 per barrel mark.

Per the accord, OPEC will lower its production by 1.2 million barrels per day (MMB/D) to 32.5 MMB/D – effective Jan 1, 2017 – from 33.6 MMB/D. Notably, the production cut – almost 1% of worldwide output – is much more than what was projected by most analysts. 

Saudi Arabiahas shouldered most of the output cut. It will lower production by about 486,000 barrels per day. Iraq, on the other hand, agreed to cut output by 210,000 barrels per day, which marks the second-highest reduction. Also, non-OPEC players, such as Russia, have shown willingness to cut production by 600,000 barrels per day. Of the total amount, Russia – the major non-OPEC oil producing player – alone will cut output by 300,000 barrels.

Why More Oil Rigs on OPEC’s Decision?

The present state of affairs is being considered by many as an opportune moment for U.S shale players to outpace OPEC in the race for production share. With the cartel’s output sacrifice, the U.S energy companies are expected to take advantage of higher oil prices in the coming days by producing more oil.

In fact, U.S energy players added more rigs last week, after OPEC announced its decision to curb output. In its weekly release, Houston, TX-based oilfield services company Baker Hughes Inc. reported higher U.S. rig count (number of rigs searching for oil and gas in the country) than the previous week.

Rigs engaged in exploration and production in the U.S. totaled 597 in the week ended Dec 2, 2016. This was up by four from the week before. In details, the report shows that oil rigs in the U.S increased by three, while the natural gas rig count rose by one.

Shale Players on the Rise

It is a well-documented fact that the Permian Basin has witnessed higher rise in rigs over the last week than any other major basin. The other three basins that showed increased rig counts are Haynesville, Eagle Ford and Barnett. As expected, the companies involved in exploration operations in those oil patches showed stock price appreciation.

Concho Resources Inc. and Devon Energy Corp. (DVN - Free Report) having resources in the Permian Basin improved 6.3% and 16%, respectively, over the last five days. On the other hand, Marathon Oil Corp. (MRO - Free Report) and Chesapeake Energy Corp. (CHK - Free Report) with acres in the Eagle Ford basin increased 20% and 19%, respectively, during the same period. 

Also, each of these Zacks Rank #3 (Hold) companies outperformed the broader industry, year to date. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

To be precise, Concho, Devon and Chesapeake gained 53%, 50% and 61% respectively, while the Zacks categorized Oil & Gas-U.S Exploration & Production industry increased 47%. Moreover, Marathon Oil has showed an improvement of 45% compared with only 5% increment for the Oil & Gas-U.S Integrated industry.

Bottom Line

U.S players are once again on track to ramp up production. This is not a good sign for the overall energy industry. Once energy firms in the U.S. start returning to fields with huge production potential, oil will again hit bottoms.

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