The big drop in rig count for the week that ended January 8, 2015 points to capitulation by U.S. shale drillers.

The total land rig count fell by 37 rigs and the horizontal rig count fell by 30 rigs (Figure 1).



Figure 1. U.S. shale play horizontal rig count. Source: Baker Hughes & Labyrinth Consulting Services, Inc.

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That’s the biggest drop since March 2015 and it suggests that drillers are out of cash. Until now, companies have been rationing dwindling funds from secondary share and bond offerings as well as equity capital.

But those sources largely dried up after October when WTI futures prices began their fall from nearly $50 per barrel to their present value of $32.50 per barrel. Investors have finally stopped believing the claims by Daniel Yergin and Andy Hall that prices would rebound, and started paying attention to the reality that I have been pointing out since May 2015.

If companies must finally pay for new wells out of cash flow, we might expect drilling to plummet in 2016 because tight oil companies have been spending other people’s money to pay for half their drilling as late as the third quarter of this year (Figure 2).



Figure 2. Third quarter 2015 tight oil-weighted exploration and production company negative cash flow. Source: Google Finance & Labyrinth Consulting Services, Inc.

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Have we reached the capitulation point or will we see some return to lower rig count declines in coming weeks? I believe that we have reached capitulation but rig counts are not overly sensitive indicators on a weekly basis of future drilling and production. Rig count reflects contract negotiations that take time and then, there is the ever-present question of drilled but uncompleted wells.

My guess is that we will continue to see a see-saw of indicators including rig count in the near-term but the trend is clearly down. Perhaps the big drop in U.S. tight oil production will finally materialize in the first half of 2016.