Those hoping that OPEC’s decision to finally curtail production at November’s Doha summit would go some way to balancing the oil market would no doubt have gasped at the latest US rig count data on Friday.
According to drill checkers Baker Hughes, the number of oil rigs up and running in the States rose by 29 during the seven days to January 20, taking the total to 551.
This was the largest one-week jump since April 2013 and means that the rig count has risen during 10 of the last 11 weeks. Meanwhile, the number of US rigs in operation now stands at a 14-month peak.
Flowing forth
Producers across the Atlantic are looking to cash-in on the bouncy Brent price in the wake of OPEC’s agreement, the benchmark surpassing the $50 per barrel marker once again. But prices have failed to march on since then as US producers have plugged their devices back into the ground.
News of bubbly supply across the Atlantic takes some of the sheen off hopes that the market will balance later in 2017. Indeed, latest stockpile data showed a further 2.8m barrel build in the States during the week to January 20, according to the EIA.
And recent industry estimates suggest that supply from oil wells should continue to swell higher. The US Energy Information Administration (EIA) for one said earlier this month that it expects crude production from the country to rise by 300,000 barrels per day in 2018, to 9.3m barrels per day.
Sure, this figure is outstripped by expected US demand growth of 370,000 barrels per day next year — at 20.22m barrels per day — but EIA production forecasts could be in for mighty upgrades should Baker Hughes’ latest shocking release mark the beginning of a trend.
And looking further out, President Donald Trump’s plans to invest vast sums into the country’s oil and gas sector could really light a fire under US production. America’s new leader vowed to “take advantage of the estimated $50trn in untapped shale, oil, and natural gas reserves” in the country just hours after taking over the Oval Office.
President Trump has since vowed to resurrect the revive work on the Keystone XL and Dakota Access pipelines this week. This illustrates the importance the new White House administration places on fossil fuel production for the domestic economy — not to mention foreign policy — in the years ahead.
Too risky?
News that US production is rising will surely test OPEC’s desire to keep its supply accord running beyond the initial six-month trial period. Meanwhile Russia and other non-cartel members — some of which also agreed to reduce pumping activity — will also be watching closely, of course.
So the road back to roaring revenues growth is fraught with danger for majors like BP (LSE: BP) and Shell (LSE: RDSB). And when you also factor-in the huge capital drain associated with their operations, not to mention the hit and miss nature of oil exploration, these companies certainly carry their share of risk.
And I believe these dangers aren’t factored-in at current share prices — BP deals on a forward P/E ratio of 15 times, bang on the FTSE 100 prospective average, while its rival changes hands on a reading of 15.3 times. I reckon cautious investors should continue to steer clear of these stocks.