Rig counts are down, but not enough to sustain a long term bounce
Rig counts in the United States have been falling at record rates since the beginning of December as the price of oil remains too low for many producers to make a profit. Goldman Sachs Group Inc. (ticker: GS) joined Citigroup Inc. and Vitol Group yesterday in predicting that the price of oil will remain down, keeping production down until global over-supply is worked down.
Falling rig counts have helped bolster crude futures 14% from this year’s low, but it is not enough to make up for the supply glut, Goldman Sachs said. Low prices will be the only effective means of rebalancing global markets, the bank said.
Historic falls in rig counts
At the time of this article’s writing, WTI is at $48.05 and Brent is at $53.95 after posting increases last week. Significantly lower oil prices caused by OPEC’s decision to maintain production in the face of stagnating global demand have taken a toll on the oil and gas industry, as U.S. operators lay down rigs. The Baker Hughes’ (ticker: BHI) weekly rig count showed U.S. drillers have cut active rigs for the ninth straight week.
The rig count fell by almost one hundred this week to 1,456 from 1,543 last week, according to the most recent data from BHI. That represents a 6% decline from the beginning of the month, and a 20% decline from the beginning of the year when the rig count was 1,811. The last high for rig counts was on December 5, 2014, when the count was 1,920.
Production hasn’t stopped growing yet
While companies have idled rigs and cut spending in order to counteract low prices, it will be some time before production is affected, according to the International Energy Agency (IEA). “The decline in the U.S. rig count likely remains well short of the level required to slow U.S. shale oil production to levels consistent with a balanced global market,” analysts including Damien Courvalin wrote, reports BNN. “Lower oil prices will be required over the coming quarters to see the required U.S. production growth slowdown materialize.”
U.S. production will increase by 7.8% to 9.3 MMBOPD this year, the fastest pace since 1972, the Energy Information Administration (EIA) said in its monthly report.
Goldman still forecasts “strong production growth,” saying most of the decline in the rig count has been for non-contracted rigs and that producers plan to renegotiate rates lower, meaning there is potential for a rebound in activity. The bank also noted that the brief rise in oil prices allowed producers to hedge against further losses, potentially reducing the need to slow output.
Low prices lead to more layoffs
BHI continued with its program of right-sizing the company earlier this week when it announced that it was laying off an additional 110 workers and closing its Mineral Wells plant in Texas. Low prices have forced the company to cut an expected 11% of its global workforce – about 7,000 jobs – in the first three months of 2015. Baker Hughes also announced that it would be closing a plant in Louisiana, cutting 60 jobs.
The company is far from alone in being forced to make cuts to its workforce. Others, including Halliburton (ticker: HAL), Schlumberger (ticker: SLB) and Encana (ticker: ECA) have all been forced to downsize headcount due to oil prices. Although the falling rig count is a harbinger of bad news for drilling contractors in the short-term, it is also a sign that production growth is likely to slow in 2015, though maybe not as quickly as some would like. In the long run, lower levels of production will help to work off the global supply glut and eventually help to bring oil supply/demand fundamentals back into line, strengthening crude oil commodity prices.
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