U.S. Oil Rig Cut Deepens in 7th week of Declines

U.S. energy firms deepened their cuts in oil drilling rigs in the seventh week of declines to the lowest levels since March 2010, data showed on Friday, as they continue to cut spending due to the collapse in crude prices.

Drillers removed 31 oil rigs in the week ended Feb. 5, the biggest cut since April last year, bringing the total rig count down to 467, oil services company Baker Hughes Inc said in its closely followed report.

That compares with 1,140 oil rigs operating in same week a year ago. In 2015, drillers cut on average 18 rigs per week for a total of 963 oil rigs for the year, the biggest annual decline since at least 1988.

Before this week, drillers have cut on average 10 rigs per week so far this year.

The deepest cuts this week were seen in the most active state, Texas, where rigs declined by 19 to 262. This marks a decline to less than half the level seen in the state a year ago, when 654 rigs were active.

The largest declines were seen in the Granite Wash formation, where rigs dropped by five to eight operating rigs, and the Eagle Ford, where four rigs were removed for a total of 60 rigs.

Front-month U.S. crude futures were trading at about $31 per barrel and Brent at $34 on Friday, on track to end the week lower after two consecutive weeks of gains.

Looking forward, U.S. crude futures were fetching around $37 for the balance of 2016 and $43 for 2017.

Exxon Mobil Corp joined a slew of oil companies in cutting spending amid the slump in oil prices, saying this week it expects to cut worldwide capital and exploration expenditures by 25 percent this year.

But even as crude futures have remained low after by plunging some 70 percent over the past 18 months, analysts say that production cuts may not follow shortly.

"Curtailed budgets have slowed investment which will reduce future volumes, but there is little evidence of production shut-ins for economic reasons," said Robert Plummer, vice President of oil investment research at consultancy Wood Mackenzie, said in a report.

The research found that aggressive cost cutting in the U.S. had enabled more of the shale plays to make money - and survive
- at lower prices.

"In the past year we have seen a significant lowering of production costs in the U.S., which has resulted in only 190,000 barrels per day being cash negative at a Brent price of $35," said Stewart Williams, vice president of upstream research at Wood Mackenzie, adding that "the majority" only become cash negative at Brent prices "well-below $30 per barrel."

Other analysts have held that a recovery in drilling is needed to staunch rapid declines from shale wells. 

"Without a recovery in drilling, the fall in output will become severe given the relatively low recent pace of productivity gains," analysts at Standard Chartered (SCBFF) said.

"The shale oil output projections at current activity levels imply that drilling has to start to rise soon to keep the market from swinging too heavily into excess demand by the end of 2016," Standard Chartered said, noting, "This means getting prices back above $50 fairly quickly."

Analysts at Bank of America (BCXQL.PK) Merrill Lynch this week forecast the rig count would increase later this year.

"With our price forecasts for (U.S. crude) at $45 this year and $59 in 2017, the U.S. rig count should increase again by the second half of 2016, albeit the expected pace of investment is likely to be much gentler than during the shale revolution," said Bank of America, noting "Shale output will return to growth in 2017, in our view."  

U.S. crude oil production averaged about 9.4 million bpd in 2015 and was forecast to average 8.7 million bpd in 2016 and 8.5 million bpd in 2017, according to the latest U.S. Energy Information Administration's Short-Term Energy Outlook.
   
 (Reporting by Scott DiSavino and Jessica Resnick-Ault; Editing by Marguerita Choy)