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US drilling and completions activities sink as political tensions rise

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US drilling and completions activities sink as political tensions rise

Crude oil and natural gas drilling and completion activities are slowing in the U.S. under the strain of global political unrest and producers' spending restraint, analysts said.

Phil Flynn, an analyst with the PRICE Futures Group said companies are in a "drilling retreat." Weekly rig count data from Baker Hughes, a GE company outlined a 19-rig decline in the U.S. rig count to 916 in the week to Aug. 23. Year-to-date, oil rigs have fallen from 858 active rigs to 754, while gas rigs have fallen from 187 to 162, Flynn said Aug. 26.

U.S. fracking activity also reflects a slowdown in producer activity with the decline in fracking accelerating in August, Tudor Pickering Holt & Co. analysts said. The most pronounced declines were in the Permian Basin, and the Haynesville, Marcellus and Utica shales, the analysts said Aug. 20.

If the second half of the year plays out like the same period in 2018, active frack drilling spreads could end the year at about 300, down from approximately 325 to 350 active today, the Tudor Pickering Holt analysts said.

"If we don't get the same [month-on-month] pop this year that we saw in Sept-18, we could end the year notably below 300 active [frack] spreads," the analysts said.

Global economic turmoil, low oil prices and demands by investors for shale producers to produce profits are behind the slowdown, Flynn said.

In an Aug. 23 note, Barclays analysts said growing protectionism and a disorderly Brexit are already dragging on global growth, a situation made worse by the trade conflict with China.

The U.S.-China trade war is dominating the headlines with the latest move by China to impose new tariffs on U.S. oil; however, the direct impact of the tariffs is expected to be minimal, Barclays said.

ESAI Energy analysts agree. Most private refiners will likely avoid U.S. oil, the analysts said Aug. 27. However, state-owned companies such as Unipec in China could keep importing U.S. crude at 150,000 barrels per day to 200,000 bbl/d for the rest of the year, ESAI said.

"Indeed, Unipec, China's biggest buyer of U.S. crude oil, is reportedly seeking a tariff waiver for U.S. oil for the coming months," the analysts said.

To keep U.S. oil flowing to China, a price differential of $6 per barrel to $7/bbl between Brent and West Texas Intermediate crude oil needs to be maintained, which is a likely scenario as Permian crude oil floods into the Gulf Coast from new pipeline capacity, the ESAI analysts said.

But the escalating trade conflict also comes with supply-side risks, as China could ramp up Iranian crude imports in defiance of U.S. sanctions, Barclays said. The analysts do not anticipate China will significantly increase Iranian imports as it could have ramifications for the state-owned oil companies. They warned, however, that "the risks of this playing out are increasing."

The lower growth and supply-side risks drive an overall bearish outlook for crude prices, Barclays said. They see 2019 Brent crude oil at $69/bbl and WTI crude oil at $61/bbl. Year-to-date, Brent has averaged $65/bbl, and WTI has averaged $57/bbl, the analysts said.