U.S. Oil Producers Add 275 Drilling Rigs in 2017 Despite 17% Decline in Oil Prices

U.S. oil and natural gas producers added six drilling rigs over the past week, bringing the nation's total count to 933, Baker Hughes (BHI) said Friday.

That's 22 consecutive weeks of rig additions in the U.S. -- dating back to Jan. 20 -- Despite less-than-supportive commodity prices. 

On Dec. 30, 658 drilling rigs were online in the U.S., meaning 275 units have come online in the first six months of 2017. By comparison, West Texas Intermediate crude prices, which were up slightly Friday, had fallen 17% since Dec. 30 as of Thursday's settlement price of $44.46 a barrel.

There are three primary reasons for such a divergence between the rig count and oil prices, according to Jeff Quigley, director of energy markets at consulting and analytics firm Stratas Advisors. 

Those are optimism from eternally bullish U.S. oil producers, lower rig costs and hedging, the latter being the most important, Quigley said.

Many U.S. producers hedged heavily after the extension cut agreement signed by OPEC in November, which helped lock in their realized prices for early 2017. Oil producers can use a so-called short hedge to lock in a future selling price for an ongoing production of crude oil that is only ready for sale sometime in the future.

But Quigley warned that drilling for oil is not completing wells. In other words, there is much more to producing oil than drilling wells. The inventory of U.S. drilled-but-uncompleted wells, or DUCs, is still growing. 

"As the DUC inventory grows it becomes clear that rising completion costs and low commodity prices are squeezing [U.S. oil producers'] ability to actually bring production online," Quigley wrote in an email to TheStreet. "[Hyrdaulic fracturing] crew availability is also an issue, while there is no shortage of rigs out there." 

Still, with such a fierce ramp in drilling activity, its no wonder why the International Energy Agency reported earlier this week that new production from rivals of the Organization of the Petroleum Exporting Countries, or OPEC, will be more than enough to meet growth in demand in 2018.

The U.S. Energy Information Administration has predicted the U.S. will make up much of that oversupply, calling for nearly 10.2 million barrels of oil per day in production by the fourth quarter of 2018 -- a number that would break a 47-year-old record. 

Of the 275 rigs that have come online this year, 222 are directed toward drilling for oil and 104 have been in the Permian Basin of west Texas and New Mexico alone. The Permian's rig count was for once flat this week.

Six oil rigs came online this week, while one natural gas rig was added and miscellaneous rigs fell by one, Baker Hughes reported Friday. Meanwhile, the Houston-based oilfield services provider's offshore rig count remained level week over week. 

Overall, the U.S. land rig count is now up 509 rigs from a year ago when it stood at 424, Baker Hughes said. Oil rigs are up 410 in the past year, while natural gas rigs have risen by 100 and miscellaneous rigs are down one. The offshore count is up one rig year over year. 

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