US oil production has been buoyed since 2022 by DUCs – drilled but uncompleted wells. These are wells that have been drilled but not yet stimulated and brought onto production. Reaching a peak in 2020 of about 9,000 wells, the US DUC inventory currently stands at about 4,500 wells. It seems that due to increased drilling activity, American DUC inventories are flattening–the national DUC inventory grew by 16 wells in August of 2022.

2022 has, however, seen a strong rally in onshore US rig counts (+226 rigs YTD). This increased drilling activity has brought oil production up off of 2020 lows, but the drilling rally seems to be flagging. In the last fifteen weeks, there have been seven weeks with a negative change in rig count. The October 7 rig count (762) sits below the September 29 rig count (767). Much of this is due to an explosion in well construction costs, estimated to be around 75% greater on average. Sand, steel, drilling rig day rates, pressure pumping services, labor, and nearly every other cost input is up considerably since the lows of 2020. Availability of rigs and frac crews, too, is a constraint.

President Joe Biden authorized a 180-million-barrel release of crude oil from the Strategic Petroleum Reserve in March of 2022. 165 million of those barrels have been sold thus far including 10 million barrels set to be delivered through November of 2022 (Marathon Petroleum and Equinor’s trading arm make up around 40% of this purchase). In today’s announcement, President Joe Biden indicated that the last 15 million barrels of the original 180-million-barrel authorization will be sold through December. With the last of the March ’22 SPR release being sold, the negative effect on oil price exerted by the SPR is set to evaporate at the beginning of next year.

President Biden also indicated also that there is a chance that additional volumes of oil might be sold out of the SPR to prevent future price hikes. The US is contractually obligated to keep around 315 million barrels in the SPR, so an additional 85 million barrels could theoretically be sold out of the SPR which might extend the dampening effect of the SPR release into Q2 of 2023. Fortunately for drillers, though, President Joe Biden indicated the Government’s desire to fill back up the SPR storage when prices dip below $70/bbl. This will provide something of a medium-term floor in prices for oil and gas companies and will allow for some confidence in oil price decks into the mid-term future.

For the first time since the 1980’s, there is more oil held in private oil storage facilities throughout the United States than is held in the SPR. These private stocks, too, are near their 2018 lows of 400 million barrels and will not likely provide any considerable negative influence on oil price in the near future.

With DUC inventories being substantially depleted, drilling schedules stalling out, the SPR running out of authorized capacity, and private oil stocks also running low on crude, many of the ingredients for a run on oil prices are present. OPEC+’s recent 2 million-barrels-per-day production cut announcement further tightens supply.

There are, however, a few potential bearish influences on oil price. As previously mentioned, there is some capacity left in the SPR. The US Energy Department’s secretary David Turk said, “We still have some additional ability to use the Strategic Petroleum Reserve over the coming weeks and months as needed” and it is possible that another release from the SPR will be authorized in order to offset OPEC+ production cuts and other supply disruptions. Secondly, it is likely that drilling activity picks up considerably in Q1 of 2023. It is possible many operators, after having surpassed 2022 capital allocations due to considerable cost inflation, will increase capital budgets for 2023 and pick up more rigs. Thirdly, though US oil production has not yet matched 2019’s prodigious numbers, 2022 US gas production is set to be the highest on record. LNG terminals are being constructed in many parts of the United States and more gas is being exported to Mexico than ever before, but the domestic supply crunch on natural gas is not as evident as it is in the case of oil. Fourthly, the government has expressed the potential of instituting a refined products export ban should gasoline and diesel prices jump considerably.

Sources

Doe announces contract awards for crude oil sales from the Strategic Petroleum Reserve. Energy.gov. (n.d.). Retrieved October 12, 2022, from https://www.energy.gov/articles/doe-announces-contract-awards-crude-oil-sales-strategic-petroleum-reserve-0

Geiger, J. (2022, October 11). White House leaves door open for additional SPR releases. OilPrice.com. Retrieved October 12, 2022, from https://oilprice.com/Latest-Energy-News/World-News/White-House-Leaves-Door-Open-For-Additional-SPR-Releases.html

North America Rig count. Baker Hughes Rig Count. (2022, October 7). Retrieved October 12, 2022, from https://bakerhughesrigcount.gcs-web.com/na-rig-count?c=79687&p=irol-reportsother

Number of drilled but uncompleted U.S. wells continues to decline from record in 2020. Homepage – U.S. Energy Information Administration (EIA). (n.d.). Retrieved October 12, 2022, from https://www.eia.gov/todayinenergy/detail.php?id=54179

U.S. natural gas production set a new record in 2021. Homepage – U.S. Energy Information Administration (EIA). (n.d.). Retrieved October 12, 2022, from https://www.eia.gov/todayinenergy/detail.php?id=54200