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Low Oil Prices Drive US Rig Count Down

Low Oil Prices Drive US Rig Count Down

The number of drilling rigs in the United States fell for the third consecutive week in December, indicating that lower prices and therefore lower profits are causing producers to cut costs, according to Baker Hughes, a leading American oil-field services company.

Onshore US drilling rigs fell by 37 to 1,499 in the week ending Dec. 26. Ten rigs were dropped in the previous week and 29 went out of service the week before that. This period saw the greatest drop since the worldwide price of oil began to fall six months ago, according to the Baker Hughes report issued Dec. 29. And it was the largest number of rigs idled since 2012.

As a result, “the rig count is falling because oil prices are falling,” Carl Larry, a Houston-based director of oil and gas at Frost & Sullivan, told Bloomberg News. “The margins just aren’t there.”

Related: If Prices Keep Falling, OPEC Must Act To Restore ‘Fair’ Rate Of $70-$80

Part of the reason for the fall is a global surfeit of oil caused in large part by the boom in US oil production employing hydraulic fracturing, or fracking. As a result, some analysts expect a lull in production to keep prices from falling even further.

“We should see the rig count going down at least through the end of the first quarter as a reaction to the low oil prices,” James Williams, an economist at WTRG Economics, an energy-research firm in London, Ark., told Bloomberg News. “By mid-year, we should see measurable impacts on production.”

Analysts at Credit Suisse agreed. “We think it will fall every week for the next three months,” they wrote in a paper on the US rig count. “We expect the market to lose at least 200 vertical and 200 horizontal rigs, and it could easily be more than that.”

Oil companies use vertical rigs to extract oil conventionally. Horizontal rigs are used for fracking, in which huge amounts of water combined with sand and a proprietary mix of chemicals is used to break open shale formations deep underground to release both oil and gas that otherwise would be inaccessible.

The US oil boom has left two benchmark crudes at the lowest prices they’ve fetched in nearly five years. On Dec. 30, Brent crude from the North Sea was down to just over $57, and West Texas Intermediate crude was trading at around $53.

Related: Obama Kicks The Oil Industry While They Are Down

Despite the drop in the rig count and oil prices, oil production in the United States is still growing. New shale wells at the Eagle Ford field in Texas and at the Bakken field in North Dakota are expected to reach record levels in January 2015, according to the US Energy Information Administration.

The reason for the American surge may be a fight for market share between the United States and OPEC, according to a report by Goldman Sachs Group. The United States once was OPEC’s biggest customer, but is now getting most of its oil from within its own borders.

A surge in US production may not appear to be cost-effective, as many observers say fracking, which is much more expensive than conventional drilling, cannot be profitable if the price of oil falls below $60 per barrel. But the Goldman Sachs Group report says some oil producers are saving money by moving drilling rigs to lower-cost fields, thereby keeping cuts in profit more shallow.

By Andy Tully of Oilprice.com

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