The number rigs drilling for oil in the U.S. plummeted by another 20 rigs during the first week of 2016 as the energy sector continues to struggle.
West Texas’ seemingly resilient Permian Basin led the way with the loss of eight rigs, while southern Texas’ Eagle Ford shale dipped by five rigs, according to weekly data released by oil field services firm Baker Hughes.
The sharp cutbacks starting the new year might represent the first sign of significant budget slashing for the new fiscal calendar, said Andy Lipow, president of Lipow Oil Associates in Houston.
“The Permian tends to be more resilient, and we might be seeing the impact of producers cutting their new budgets,” Lipow said.
The oil rig count now stands at 516 rigs, down 68 percent from when oil field rigs were operating at the peak of the U.S. oil boom in October 2014, when oil rigs totaled 1,609. The amount of rigs exploring for natural gas also sunk sharply by 14 down to just 148 rigs.
The overall rig count is at it lowest point since 1999. Texas still counts 308 rigs, which is nearly half of the nation’s total of 664 rigs. Louisiana picked up one new rig and it was the only gainer in the country for the week.
The holdouts, essentially, can no longer hold out, said Marshall Adkins, director of energy research at Raymond James in Houston.
“The last bastions of resistance are being ferreted out by the low price of oil,” Adkins said. “It’s rapidly becoming a wasteland.”
The price of oil also continued to sink Friday with the benchmark for U.S. oil settling at $33.16 a barrel, down 11 cents for the day and at its lowest settlement since 2004 on the New York Mercantile Exchange.
“Below $50 the industry doesn’t work, and we’re well below $50,” Adkins said. “Oil prices have been a disaster. At these levels, you’re going to see everyone cut back.”
Rig count and oil production reductions are likely to continue at least through March thanks to the global glut of oil supply, Lipow said, but also because U.S. refiners will soon enter into spring maintenance periods and their demand for crude oil will temporarily decline.
The next three to six months are expected to be ugly, Adkins said, but he is bullish heading into the latter half of the year, and even for 2017 and 2018.
The ongoing U.S. production cuts will eventually put supply and demand back into synchronization, Adkins said. That balance will have a much greater impact than the market’s focus on China’s weakening economy and other concerns, he said.