Driven by the prolonged weakness in oil prices, in addition to the plunge in natural gas futures, Rystad Energy expects further declines in US onshore activity as operators pull back plans. But the pace of deceleration may slow in the coming months on the back of the brisk fall seen over the past few weeks. Horizontal drilling is set to decline by 2%, while completions increase by 3% year over year in 2023, our analysis shows. The revisions are due to current market conditions and the recent drop in rig and frac fleet counts.

Average spot market service prices are expected to continue softening across all US basins. Spot land rig rates for 1,500 horsepower (HP) AC rigs have been falling due to the decline in activity in the second quarter. US rig counts are down by 35 from a month earlier, 67 quarter-on-quarter, and by over 90 since the beginning of the year. Contracted rig rates are above $30,000 per day, and current spot rig rates for 1,500 HP AC are ranging between $27,000 and $30,000 per day.

Some service companies have moved rigs and equipment from gas to liquids-rich basins, which have improved supply and impacted prices in liquids-rich basins. Additionally, in the second quarter, we saw weakness in the pressure pumping market as active frac fleets dropped from 282 in the three months to 265. Deactivation occurred across various companies, with gas basins being the most impacted. Frac prices have been adjusted downward due to the weakness in the market.

Public shale exploration and production (E&P) companies are remaining focused on boosting shareholder returns, targeting single-digit production growth this year to earn healthy margins and conserve cash. This means that most capital expenditure (capex) increases in 2023 are being driven by cost expansions from contracts locked in during the final quarter of 2022, rather than any production growth. Rystad Energy projects US capex to grow by 10% in 2023, and well costs will start to decline from the third quarter going forward.

We expect prices of drilling services to continue softening across all US basins in 2023, with an average decline of more than 10% from fourth quarter 2022 levels. Drilling rig rates peaked in January at around $35,000 per day and have come down to trail below $30,000 per day for 1,500HP AC modern rigs in oil basins. Prices for oil country tubular goods (OCTG), commonly used to refer to pipes and casings, have dropped by over 17% since January, and we expect further declines. Directional drilling rates are slowly falling, with service companies trying to find new homes for their crews. US diesel prices are down from the peak touched in the second quarter of 2022. However, we expect prices to rebound as we enter the summer driving season amid an expected pickup in demand.

Market supply and demand fundamentals still look strong. Yet, prospects of a global economic slowdown are weighing on prices, as evidenced by the steady pressure on Nymex WTI futures, which is set to further dampen the activity outlook. Rystad Energy expects an uptick in activity in the fourth quarter of the year, as service costs become more attractive for operators and energy prices stabilize due to tightening supply.