Plummeting global rig count could trigger oil supply crunch

With much of the focus on oil production in the U.S. and the Middle East, a rapid reduction of oil exploration in the rest of the world could lead to a sooner-than-expected oil supply crunch, a new analysis warns.

The current global oil glut is distracting from the future supply of crude as most of the world is quickly cutting back on the number of rigs actively drilling for oil. And the huge number of energy sector layoffs worldwide will only make an eventual recovery take longer, according to a report released Tuesday by Houston-based Simmons & Co. International, which was recently acquired by Piper Jaffray & Co.

Although Saudi Arabia and much of the Middle East are remaining active despite low oil prices, the international rig count has plummeted by 30 percent to 43 percent since mid-2014 in other regions. Africa and Latin America are both down by about 43 percent, according to rig count numbers compiled by Baker Hughes, while Europe and Asia Pacific have cut back their rig counts by 30 percent.

It’s amazing how much focus there is on the U.S. oil bust and not the global ramifications, said Bill Herbert, senior research analyst with Piper Jaffray. There could be “grievous consequences” on producing the world’s future oil supply, even if there is ample oil in the ground.

“The fact of the matter is there’s a world of carnage unfolding and it’s increasingly widespread,” Herbert said. “We’re digging ourselves a very deep hole.”

Although it’s tough to predict when a breaking point could occur, he said, the world may need more North American oil sooner than many expect. The U.S. oil rig count is now down more than 75 percent from its peak of 1,609 in October 2014 before oil prices began plummeting.

But shale production in the U.S. cannot turn on a dime and scale back up as needed, Herbert said. Top U.S. shale producers like Houston-based EOG Resources recently indicated the industry needs at least $65 a barrel oil over an 18-month duration to truly create a strong rebound. That compares to the U.S. benchmark for oil sitting below $37 a barrel on Tuesday.

And companies can’t grow production as “quickly and significantly” as many outsiders believe, Herbert said, because the widespread layoffs and budget cuts in the oil field services sector cannot be quickly corrected.

Companies may struggle to draw new employees back into the “ravaged labor pool,” Herbert said, and much of the idled oil field equipment is being scrapped for spare parts.