NEW YORK (Reuters) - It sounds like simple math: as the United States continues to shed oil rigs, production cuts will follow.
On Friday, oil-field service company Baker Hughes reported that oil rigs fell by 49 in the latest week to 1,317. The count has fallen 165 in January, the biggest three-week decline since 1987.
But experts say output cuts do not necessarily follow a reduction in rig count. Some point to the 2008 crash in natural gas prices, when producers cut rigs but production actually increased.
“Rig counts can be misleading,” said Anthony Yuen, a commodity strategist at Citigroup. Yuen co-authored a recent Citigroup research note that looked at how the 2008 natural gas price crash may compare with the current plunge in U.S. crude oil prices, down more than 50 percent since the summer.
Thus far, the decline in oil rigs is almost identical to the drop in natural gas drilling in the second half of 2008, when prices slid in 14 months from $13.57 per million British thermal units to a low of just $2.50 mmBtu.
In both cases, the rig count peaked at just above 1,600 rigs, then fell around 300 rigs in the next 16 weeks, a decline of 18 percent for oil and 21 percent for gas. Gas rigs reached a low of 672 by July of 2009, according to Baker Hughes.
Yet natural gas production grew 12 percent between September of 2008 and 2009, even though the number of rigs dropped from 1606 to 710, data shows.
Today, the number of natural gas rigs is closer to 300, yet production is up 50 percent from when the rig count peaked, data shows.
Randall Collum, managing director for energy at Genscape, said natural gas production remained strong because it had a secret weapon the oil industry lacks: the Marcellus shale.
“It stayed so strong and was able support production. I don’t see the equivalent in oil,” Collum said.
He estimated that oil rigs will be slashed by 650 in nine months, down 40 percent from their peak, which should reduce production. He said he once believed U.S. production could grow by 1 million bpd this year, but now expects slower growth, particularly in the second half.
Citigroup said that even if producers in major oil plays cut capital spending 40 percent, they could still boost output 800,000-bpd using the same efficiencies that propelled growth in U.S. natural gas production. Without the cuts, production would grow by an additional 100,000-bpd, Citigroup said.
In its latest estimate, the U.S. Energy Information Administration projected crude oil production would rise on average by 640,000-bpd. EIA expects production to weaken in the middle of the year and rebound with oil prices by the end.
In a research note Monday, before the latest data came out, Standard Chartered said rig counts in the four major shale plays, Eagle Ford, Permian, Bakken and Niobrara, have dropped 84 in the past two weeks and are just 125 above the level that should signal the start of declining U.S. output.
“We believe the sharp falling away of US drilling activity and the rapid cuts across the world in non-OPEC supply suggest oil prices have fallen far below any sustainable level,” the company wrote.
Tom Pugh, a commodities expert with London-based Capital Economics, issued a research note Wednesday that predicted U.S. shale oil production will decline in the second half of 2015. He said production declines will be slowed by drilling efficiencies, producer hedges and an ample supply of new wells that produce at higher levels at the outset.
The upshot, Pugh said, is production declines will help provide a floor to oil prices and eventually spur a rebound. “This supports our view that the price of Brent will rebound to $60 per barrel by the end of the year,” Pugh said.
Reporting By Jarrett Renshaw; editing by Jessica Resnick-Ault, Jonathan Leff and David Gregorio