The upward move in oil prices had been ongoing since the introduction of production cuts by OPEC in January 2017, and the subsequent tightening of supply. Prices have since fallen amid speculation and concern over the impact of rising US production. Falls in oil prices can be reflected in lower wholesale gas prices, given the use of oil-linked long-term gas contracts across Europe.
Drilled but Uncompleted Wells (DUCs)
Higher prices make oil and gas production more profitable, and even more so for drilled but uncompleted wells (DUCs). As the name suggests, these are projects which have not yet been finished. The advantage of DUCs is the cost for them to start producing oil is less than starting a new project and they can be in production significantly quicker. As oil prices fluctuate, and rates of production from shale change significantly over a short period of time, many wells are being drilled yet left uncompleted.
As a result of current price increases, more wells are being drilled. The US Rig Count measures drilling activity across the United States for gas and oil production. It has been steadily increasing since the beginning of 2017. As of the start of January this year, a total of 939 rigs are operational in North America, an increase of more than 40% from this time in 2017. Due to increasing numbers of rigs, US oil production has been increasing too. The US Government reported a peak of 9.9 million barrels of oil per day, a level not seen since 1971.
Production is expected to reach peaks of 10 million barrels a day in February, making the US the third largest producer behind Saudi Arabia and Russia. However, there is speculation that US production will carry on increasing, as the number of DUCs has been rising alongside production in recent months.
Will this have a further impact on prices?
Once these wells come online, US production will likely increase further still. This would reduce the impact of the OPEC production cuts, and further depress oil prices. Given the use of oil-linked long-term gas contracts across Europe, any fall in oil prices could be reflected in lower wholesale gas prices. This would then be reflected in the wholesale element of consumer bills.
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