August Snapshot: Oil & Gas Supply Fundamentals

Trends & Insights


The oil and natural gas price downturn is common knowledge due to the fundamentals of oversupply from the Middle East and continuing high levels of production from the USA. Recent events, such as the Iran Nuclear Deal that have further potential to add supply to the market, has suppressed prices. As efficiency gains increase across drilling and completion activity (asset utilization, pad drilling, and improved drilling logistics), operators will continue to drill at lower prices. WTI stands at about $45/barrel and Brent at $50. Economic uncertainty in Greece/Eurozone and China has created uncertainty over long-term demand as consumer spending lowers.

Rig Count

The Baker Hughes rig count has shown signs of stability from the heavy declines since the turn of the year in the USA. However, with US oil rigs on the showing signs of a steady increase (+64 oil rigs since June 26th), this further adds to the supply surplus. International rig count has continued to decrease through the year with Latin America, Africa, and Asia Pacific declining the most in Q2.


According to the IEA Oil Market Report, OPEC crude output rose in June to 31.7 mb/d (340 kb/d from May), which is a three-year high due to supply from Iraq, Saudia Arabia, and UAE. In turn, global demand growth has slowed by 0.2 mb/d from 2015 to 2016. US shale production will continue to grow at a slower rate, but a key driving point in this downturn will be how companies fulfill contracts and oil and gas leases to avoid expiration.


Gas prices have continued to remain low, despite expected US LNG exports starting by the end of the year. Efficiency gains have created a surplus of gas, though as oil drilling slows down, NGL production and associated dry gas production is expected to increase. Despite warmer summers compared to last year, which has led to increased consumption, overall greater production year-on-year has continued to suppress prices. LNG supply remains high and the global trade fundamentals will be important to understand how future projects develop.


Source: Baker Hughes Rig count, US EIA, IEA July Oil market report