Oil Patch Problems: Rigs Down 60%, Production Down 3%, $40-$50 Price Doesn’t Work

With every bounce in the price of oil, US producers used enhanced techniques to get more and more oil out of existing wells. So even as rig counts collapsed, production is barely off the highs, at a price that isn’t even profitable.

Oil Flirts with $40 Again 

Prices are once again flirting with $40. Crude has not hand a monthly close below $40 since mid-2004. And $40 to $50 is not even profitable, putting producers into a bind.

Oil Patch Problems 

The Wall Street Journal explains:

U.S. companies have stunned global rivals by continuing to produce oil—particularly from shale deposits—ever more cheaply as American crude prices plunged from over $100 a barrel in 2014. But the recent drop toward $40 a barrel and below puts even the most efficient operators in a bind.

“Forty-dollar to fifty-dollar oil prices don’t work in this business,” Ryan Lance, chief executive of ConocoPhillips (COP), the largest independent U.S. oil producer, said in an interview.

The worst-case scenario most major producers have discussed in the past six weeks with investors involved a price of $50 a barrel. That is beginning to look optimistic as Saudi Arabia continues to produce near-record volumes and major exporters such as Iraq have increased output. Many oil executives, including BP PLC CEO Bob Dudley, expect prices to be “lower for longer.” The U.S. Energy Department is forecasting the price of oil will average around $50 a barrel next year.

Breakeven Price

More than 250,000 people world-wide have lost their jobs in the industry over the past year, according to Graves & Co., a Houston consulting firm. Many companies that were hoping to weather low energy prices without new rounds of layoffs and salary cuts may be forced to slash those costs yet again, said Eric Lee, an energy analyst with Citigroup.

“We’re really reaching the limit of what people can do,” said Allen Gilmer, chief executive of Drilling Info, an Austin, Texas company that compiles data on tens of thousands of shale wells across North America. “Right now, you are down to the best areas, the best rigs, the best people. Any cuts from now on are bone rather than fat.”