Some US oil producing areas will weather slump better

US oil and gas rig counts dropped to their lowest level in over four years, falling by an additional 74 units for the week ended Jan 16. The lower count provides fresh evidence that low oil prices are forcing drillers to pare back operations and slash spending.

While that may soon begin to cut into actual production figures, a new Wood Mackenzie report finds a lot of nuance in the oil patch, painting a complex picture of what to expect in 2015. The report identifies several trends beyond the simple narrative that low prices will force a cutback in drilling.

First, Wood Mackenzie estimates that at US$40 per barrel, many producing wells could be shut in. In fact, about 1.5 million barrels per day of production would be "cash negative" - meaning it wouldn't even make sense to continue pumping at the most marginal wells, which tend to have extremely low output. These "stripper wells", which only produce 15 barrels of oil per day or less, have high costs given their level of production. Wells producing such a tiny flow of oil may seem like a non-issue, but with hundreds of thousands of them dotting the United States, they collectively account for about one-tenth of the nation's production. As these wells become unprofitable, production should start declining.