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Here’s why the oil glut may continue

Bloomberg

There are fewer and fewer of these in the U.S.

nergy companies are slashing spending budgets and shutting down oil rigs, but don’t expect U.S. oil production to slow down soon.

There is so much oil available that it will take a while for those measures to make a dent in production. In addition, most of the rigs mothballed so far were in low-yield wells—low-hanging fruit that won't make much of an impact.

Analysts at UBS said in a recent note they expect the rig count to fall at least 31% this year, and potentially more if oil prices remain lower. The bulk of the decline will come in the first half of the year, with some flattening in the second half, they said in the note.

Two other reasons that fewer rigs may not immediately translate into less production include increased drilling efficiency and an oil-well backlog that will serve as a cushion in the coming months, the Energy Information Administration has said.

There has been a 16% decline in the number of active onshore drilling rigs in the continental U.S. from the end of October through late January, said the EIA.

As well as shutting rigs, companies have been cutting costs to varying degrees based on balance-sheet size, with smaller companies tending to cut deeper. On average, companies have cut this year’s capital expenditures by about 30%.

Exploration and production energy companies are going over their budgets, rationalizing spending and drilling activity “at an even faster pace than we thought possible just 6 weeks ago,” analysts at Simmons & Co. wrote in a note earlier this week.

“We believe improvement in the oil supply/demand macro is on the horizon,” they said.

Claudia Assis