The U.S. oil and natural gas rig count experienced a slight decline, falling by four to a total of 633 rigs for the week ending August 21. Despite this modest drop, industry analysts have noted a surprising resilience in both oil supply and natural gas prices as the year progresses, suggesting that the market may be more robust than previously anticipated.

Stable Rig Activity Across Major Basins

In the eight large unconventional basins within the U.S., the domestic rig count showed minimal movement, either remaining steady or changing very little in either direction. Interestingly, while three of the five major oil-producing basins saw an increase in rigs, two of the three gas-focused basins experienced a decrease, based on data available as of August 29. Specifically, gas-directed rigs were hit hardest, contributing to the overall four-rig weekly loss, bringing the total down to 95 rigs. Conversely, oil-directed rigs remained stable at 538.

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Rig Count Trends Reflect Industry Dynamics

Over the past several months, the total number of active domestic oil and gas rigs has remained relatively stable within the 630s range. However, there has been a slight decline in the average rig count during the third quarter of 2024, a trend largely attributed to increased efficiencies in well drilling. These efficiencies have allowed upstream operators to achieve their objectives with fewer rigs in the field. Additionally, mergers and acquisitions (M&A) within the industry have led to temporary rig pullbacks, as operators pause their drilling activities during transition periods to reassess their forward strategies.

As it stands, the average rig count for the third quarter is 633, down from 641 in the second quarter and 662 in the first quarter of 2024. While rig activity has remained at relatively low levels, especially when compared to previous years, crude oil prices have remained stable, and there is potential for a surprising uptick in oil production as 2024 draws to a close. Natural gas, on the other hand, may experience a year-end trough, but analysts are optimistic about a price recovery as we move into 2025.

Resilience in U.S. Tight Oil Activity

Walt Chancellor, an energy strategist at Macquarie, a global financial services advisory firm, highlighted the resilience of U.S. tight oil activity in a recent investor note dated August 27. According to Walt Chancellor, an energy strategist, the market has underestimated the robustness of tight oil activity, particularly in the Permian Basin. Despite a lower rig count and ongoing M&A activity, Chancellor noted that the industry is demonstrating unexpected strength.

Chancellor emphasized that while increased efficiency and reduced costs were previously seen as potential counter-cyclical forces, these factors are now playing a more significant role in the shale landscape for 2024 and 2025. Although the exact timing and scale of these developments remain uncertain, he believes these forces could lead to an eventual upside surprise in the U.S. oil supply.

Potential Upside in Oil Supply by Year-End

Walt Chancellor further projected that U.S. oil production could exit 2024 at a significantly higher level than currently forecasted by major agencies. While the U.S. Energy Information Administration (EIA) has forecasted U.S. oil production at 13.4 million barrels per day (b/d) for the fourth quarter, the Chancellor's outlook is more optimistic. He anticipates that U.S. oil production could reach as high as 13.9 million b/d by the end of 2024. This would represent a substantial increase from the 12.9 million b/d recorded in the first quarter and the 13.25 million b/d projected for the fourth quarter of 2023.

Gulf of Mexico and Shale Production as Key Growth Drivers

The expected increase in U.S. oil production is likely to be driven by both offshore and onshore resources. Chancellor pointed to the U.S. Gulf of Mexico and unconventional shale resources as key contributors to this growth. The EIA has estimated that oil output from the U.S. Gulf Coast could reach 1.82 million b/d in the fourth quarter of 2024, while S&P Global Commodity Insights has projected an even higher figure of 1.88 million b/d, up from 1.78 million b/d in the first quarter of the year.

Onshore, shale production is also showing strong growth potential. Chancellor noted that second-quarter earnings reports from public oil producers revealed strong organic sequential growth, with more visible 2024 growth emerging in company guidance. While public companies are expected to account for a significant portion of the anticipated 500,000 b/d increase in Lower 48 land production from the fourth quarter of 2023 to the fourth quarter of 2024, Chancellor's outlook also calls for meaningful contributions from private companies. 

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