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US rig count rise points to likely bottoming out

Up by 21 from last week, the US rig count shows shale executives are eyeing a return to growth

Around early May, as US oil prices crept back towards $60 a barrel from a low of $43/b, many shale executives ditched the talk of austerity and said they were eyeing a return to growth. EOG Resources and Whiting Petroleum were among a small handful of companies that said costs had fallen low enough and their drilling productivity had improved enough to justify putting rigs back to work in the second half of the year at $60/b. Many analysts dismissed the talk as braggadocio aimed at Opec rivals or simply soothing words for jittery investors.

But it appears many drillers are following through. The US oil-directed rig count rose by 21 last week to 659. It was the largest single-week gain since May 2013, and is the surest sign yet that, without another steep fall in the oil price, the rig count has bottomed out after an eight-month long free fall.

The Permian Basin in west Texas has led the way as shale drillers there continue to increase production in spite of the low oil price. Oil-directed rigs in the Permian Basin, which has proved to be the most resilient through downturn, rose by three to 244 last week, 14 higher than a month earlier, according to data from Baker Hughes. There were also gains across many other major shale plays, with the Eagle Ford count up by two and the Niobrara and Bakken both adding one rig.

The rise in the rig count is bearish for US oil prices, which have fallen back below $50/b after topping $60/b last month. But the uptick in rigs doesn’t mean a flood of new shale supply is about to hit the market.

While shale producers have enjoyed a brief respite they still face a host of challenges. Drilling is still only profitable in the very best acreage of the best shale plays. Price hedges that had helped bolster bottom lines in the first half of the year are unwinding, leaving many drillers exposed. And the Fed has signaled an interest rate increase is likely to come sooner rather than later, which will reduce the amount of financing available to cash-strapped and highly indebted drillers.

As a result, analysts at BofA Merrill Lynch argue, the rig count is likely to continue a slow and steady recovery as stronger companies increase activity on their core acreage. The rig count could rise to close to 700 by the end of this year and to more than 800 by the end of next year, according to the investment bank. However, the decline in shale output that started this summer is expected to continue into next year, leading to the first outright decline in US oil production in nearly a decade in 2016.

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