Oil prices rise as U.S. drilling declines

SINGAPORE Oil prices rose by around one percent on Monday as U.S. 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 over 50 percent since June 2014, when soaring global production started to clash with slowing demand.

The low prices are beginning to impact U.S. output as drilling is reduced.

U.S. 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.

U.S. West Texas Intermediate (WTI) crude futures CLc1 were trading at $45.31 per barrel at 0125 EDT, up 63 cents. Globally traded Brent futures LCOc1 were up 57 cents, or over one percent, at $48.04 per barrel.

“The current rig count is pointing to U.S. production declining sequentially between 2Q15 and 4Q15 by 255,000 barrels per day at the observed path of the U.S. 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 percent on projects, supply chain savings through squeezing the service sector will only achieve around 10-15 percent on average,” energy consultancy Wood Mackenzie said.

“$1.5 trillion of uncommitted spend on new conventional projects and North American unconventional oil is uneconomic at $50 a barrel,” Woodmac added.

Despite such a cut to U.S. 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 U.S. 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.

Recent oil trading has seen the WTI/Brent price spread WTCLc1-LCOc1 fall by two-thirds to minus $2.4 per barrel as North America’s market tightened while global markets slumped due to high production and an economic slowdown in Asia.

(Editing by Himani Sarkar and Tom Hogue)