The Shortcut Is Gone

We covered triple-digit crude last week, so we'll skip the price tape. Historically, we had a couple of shortcuts to help alleviate price pressure. Let's cover the condition of those two buffers…

THE SHALE BUFFER.

$100 oil used to produce a fast American supply response. It doesn't anymore.

Shale had a shortcut. Operators kept a standing inventory of wells that were drilled but not yet fracked. Drilled but uncompleted, or DUCs. The hole was already in the ground and the money was already spent, so when prices ran, you sent a completion crew and had barrels in weeks instead of quarters.

That inventory is mostly spent.

EIA's count peaked above 8,800 wells in the second quarter of 2020 (EIA). By April of this year it was down to 4,972, the lowest on record and a fourteenth consecutive monthly decline. In the Permian, the count sat near 783 in June, down about a third from a year earlier (Kpler). As Brandon Myers of Novi Labs put it to Reuters, the DUC count is meant to absorb quarter-to-quarter swings, not to be drawn down six quarters in a row (Reuters). Current series: EIA STEO data browser.

Which explains the rig count. U.S. rigs rose to 595 in the week ending September 18, with oil rigs at 452, the highest total since May 2024 and up 10% from a year ago (Baker Hughes).

Rigs are climbing because the shortcut is gone. Adding a barrel now means drilling it.

DRILLING GOT MORE EXPENSIVE TOO.

Here's the part that doesn't show up in the rig count.

Diesel runs the oil patch. Rigs, frac spreads, water hauling, sand trucks, rig moves. And diesel just went vertical. EIA's weekly update put the national on-highway average at $6.285 per gallon for the week of September 14, the first time it has ever been above $6 (EIA series), after passing the old June 2022 record of $5.810 earlier this month (Forbes).

That lands directly on the cost of a well. In the Dallas Fed's June survey, roughly two-thirds of oilfield services firms reported rising input costs and not a single firm reported a decline (Dallas Fed). One services executive told the Fed diesel alone was up roughly 65% since January.

So the smaller independents are being careful. They are drilling their best rock, not all of their rock, and they are pacing spending against a cost base that keeps moving on them. That's rational. It is also why a price signal this strong is producing a supply response this modest.

THE OTHER BUFFER.

The government's cushion is in similar shape.

The SPR held 285.0 million barrels in the week ending September 11, roughly 40% of its design capacity and the lowest level since November 1982. It is down 130.5 million barrels since late March, after the U.S. committed 172.2 million barrels to what became the largest coordinated IEA release in the agency's history (EIA weekly series).

Worth knowing how it was structured. This was an emergency exchange, not a sale. Companies borrowed the crude and have to return it, with additional barrels as a premium, with repayment running from late 2026 into 2029 (structure detail).

Those repayment barrels have to be bought somewhere, ahem…future demand.

WHAT CAPITAL IS DOING ABOUT IT.

Buying inventory instead of drilling it.

U.S. upstream deal value hit $38 billion in the first quarter, the highest in two years (Enverus), then fell to $9.1 billion in the second, a 76% drop (Enverus). That reads like a slowdown. Look underneath it.

More than 40% of second-quarter value came from one event, the BLM's record-setting New Mexico lease sale, which generated more than $4 billion. Matador paid roughly $1.3 billion for Paloma's Permian position, and Magnolia bought WildFire Energy in the Eagle Ford (SEC 8-K). Enverus attributes the quarterly drop to volatility widening bid-ask spreads rather than buyers losing interest, and notes valuations for prime Permian inventory kept climbing as quality drilling sites get scarcer.

Fewer deals. More money for the good rock.

THE READ.

Both buffers are drawn down. Replacement barrels cost more than they did. And the people closest to the rock are paying record prices to own more of it.

We won't tell you where the price goes. We're just comfortable with our projections using $70 oil.

— Your Oil & Gas Team for Direct Private Well Ownership

CrownForge Energy.