US oil production has finally started catching up to the massive decline in drilling rigs. For June monthly output data, production fell to 9.296mm barrels per day, versus a multi-decade high of 9.612mm barrels per day in April. This week, oil rigs declined to 640 per Baker-Hughes data, versus 644 the week before. After bouncing somewhat from lows of 628 operating rigs in June, the rig count (and therefore future oil production) is once again declining. That said, as shown by the long lag between rig counts (which peaked at 1609 in October of 2014) and supply reduction, productivity has been soaring; as a result, it’s unlikely we’ll see a decline in US production anywhere near as large as the decline in rigs.

Natural gas production is a good example. Supply of natural gas has skyrocketed since 2006, despite a peak in drilling rigs back in 2008. Granted, there’s a lot of natural gas produced as a by-product of oil drilling and pumping, but the stark reality for the industry is that there have been massive increases in productivity. While it’s unlikely we’ll see the same level of productivity acceleration in crude production, the lesson of ever-higher natural gas drilling productivity is a good lesson for oil sector longs hoping their investments’ competitors start shutting in production capacity.

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