As the Trump Administration re-activates sanctions on Iran and its crude oil exports, now seems a good time to assess the current state of the U.S. oil and gas industry:
The overall rig count continues its slow rise. – The U.S. rig count has risen slowly and steadily throughout 2018, and that trend has continued at the outset of the second half of the year. The DrillingInfo daily rig count moved up from 1114 on July 21 to 1133 as of August 20. Absent an unforeseen price collapse, this is a healthy and sustainable trend that is likely to continue through the end of the year.
This has taken place despite the fact that the price for crude oil has dropped for 7 straight weeks. But it really should not surprise anyone, since the count is driven by the big corporate producers who are now implementing second half 2018 budgets that were revised during April and May when prices were at higher levels. The execution on these budgets will continue so long as crude prices remain within 10-15% of their current levels.
DOE offered 11 million barrels of crude oil from the U.S. Strategic Petroleum Reserve (SPR) for sale to coincide with its re-implementation of Iran sanctions. – This is an interestingly-timed move, but largely symbolic in nature given that its small volume will do little to offset potential losses to supply caused by the sanctions on Iran. The sale is part of a drawdown of the SPR mandated over the last couple of years by congress in actions ostensibly designed to “control” deficit spending that were themselves largely symbolic.
The reality is that any real attempt to offset the volumes of reduced Iranian production would have to come from further increased export volumes by Saudi Arabia and Russia. Both of those countries announced increases in exports during June and July in what has been a successful effort to lower crude prices. The extent of the ability of either exporting nation to further increase exports remains an open question, though there is general agreement that both do retain some amount of excess capacity.
Further complicating the delicate balancing situation, Iran’s permanent envoy to OPEC, Kazem Gharibabadi, warned other OPEC members over the weekend that “No country can overtake the production and export quotas of other member states under any circumstances.” Iran’s Oil Minister, Bijan Zanganeh, had issued a similar warning several days earlier in response to a proposal by Saudi Arabia that would raise quotas for OPEC members with excess capacity to make up for declining production from other member countries.
