Oil prices rose by around one per cent on Monday as US drilling slowed and analysts estimated that $1.5 trillion worth of planned American production investment was uneconomical at prices of $50 per barrel or lower.
Crude prices have plunged more than 50 per cent since June 2014, when soaring global production started to clash with slowing demand. This includes losses of more than a quarter since June this year as a sharp slowdown in China has sparked concerns over the health of the world economy.
The low prices are beginning to impact US output as drilling is reduced.
US drillers have cut the rigs in operation three straight weeks as cheap oil is causing them to hold up production plans, triggering an increase in prices on Monday.
US West Texas Intermediate (WTI) crude futures were trading at $45.21 per barrel at 0535 GMT, up 53 cents. Globally traded Brent futures were up half a dollar, or more than one per cent, at $47.97 per barrel.
“The current rig count is pointing to US production declining sequentially between 2Q15 and 4Q15 by 255,000 barrels per day at the observed path of the US horizontal and vertical rig count across the Permian, Eagle Ford, Bakken and Niobrara shale plays,” Goldman Sachs said.
“The implied year-on-year growth by 4Q15 of 120,000 barrels per day is lower than the prior week’s estimate of 125,000 barrels per day,” it said.
Analysts said low prices would have a bigger impact in the longer term as producers struggle to cut enough costs.
“While operators are seeking an average cost reduction of 20-30 per cent on projects, supply chain savings through squeezing the service sector will only achieve around 10-15 per cent on average,” energy consultancy Wood Mackenzie said.
Despite such a cut to US spending plans, analysts said prices were expected to remain at low levels for some time to come as other producers, especially in the Middle East and Russia, keep pumping near record levels.
“Oil producers continue to battle for market share ... widening the global oil surplus,” ANZ said on Monday.
The bank said it expects US crude to fall below $40 per barrel over the next six months and to average just $41 next year. It expects Brent to average $46 per barrel in 2016.
Reuters
