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US Oil and Gas Rigs in Operation Drop By 60% as Prices Embark On Recovery

US Oil and Gas Rigs in Operation Drop By 60% Amid Pandemic

The pandemic has drastically decreased demand for oil and gas globally and some producers have been forced to act. New data shows that as the demand dropped, most oil and gas rigs were shut down.

Data presented by Bankr indicates that the United States oil and gas rigs in operation have dropped by 59.49% between February 2020 and November 2020. In February, the rigs were 790 while in November the number was at 320.

The research also overviewed the weekly Brent, OPEC Basket, and WTI crude oil prices between December 30, 2019, to December 7, 2020. During the period, the OPEC basket dropped by 30.65% with the lowest price at $14.19 on April 20. WTI crude oil prices plunged by 25.81% while April 20 registered the lowest price at -$37.63. Elsewhere, the Brent price plummeted by 28.71% and the lowest value was on April 28 at $20.46.

Reduced oil demand forces producers to close rigs

The drop in the number of US oil and gas rigs have historically followed changes in oil prices over an elongated period. However, the 2020 decline in rigs followed the dramatic decrease in the oil prices at a rapid pace. The rig count began to plunge in February, something that was reflected by the sudden loss of oil and gas demand globally due to the pandemic.

The global oil consumption is mainly driven by the transport sector and in the course of the health crisis, authorities imposed lockdowns that grounded travel. A combination of falling demand, rising supply, and decreasing storage space led to a massive crude petroleum price drop. The negative price movement’s impact was significant on April 20 when crude petroleum traded at a negative price.

The steady closure of rigs translates to less oil being produced. The closure continued across the year as producers ran out of space to store their extra oil with the crisis continuing to bite.
At some point, the government intervened with President Donald Trump pledging support for the oil industry. Government storage facilities were opened, so that producers do not have to sell at a loss due to lack of storage. However, these measures appear to have had little impact on the sector.

Furthermore, some rigs were forced to shut down as a safety measure for workers. This is after several facilities recorded cases of Covid-19. The closure was necessitated by the fact that most rigs have limited medical facilities, great distances from the mainland hence it could be devastating if they recorded cases of coronavirus. However, the emergence of a vaccine could reverse the fortunes of the sector.

On the other hand, gas rig activity is known to decrease alongside the natural gas price. However, the decrease in natural gas prices began earlier even before the pandemic. Gas rigs have been impacted by the warm weather and relatively small withdrawals from storage during the winter which led to a sustained decrease in the gas price.

The future of the oil industry post-pandemic

After collapsing to worse levels in April, oil prices have partially rebounded following several response measures like the lifting of the lockdowns. Additionally, the steep response by OPEC and its partners are key in controlling oil production. The recovery in prices was driven by a reduction in production through the OPEC+ initiative. The group agreed to cut production by 9.7mb/d, which is about 10% of the global oil supply. In general, while oil consumption has risen from its lows in 2020 Q2, it remains well below its pre-pandemic level.

Going into 2021, the pandemic’s full effect on the oil rigs and prices cannot be fully quantified. The crush might have a lasting impact on consumption due to changing consumer behavior. In the long-term, the pandemic is likely to affect oil consumption as people cut on air travel for business with a preference for remote working. Working from home trends might also lower the gasoline demand. The future forecast in oil demand will also impact corporate investment decisions.

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