After a precipitous drop since October, the U.S. oil rig count is nearing a pivotal level that experts say could begin to dent production, bolster prices and even coax oil companies back to the well pad in the coming months.

Energy producers responded quickly to a steep drop in oil prices over the last six months, idling nearly 800 rigs, or 50 percent of a 1,609 peak hit in October.

But the decline, which followed a 7-month oil price rout, has slowed in recent weeks, a sign that the rig count could be approaching its low point. Some reckon that a 50-60 percent drop is as far as it will fall.

"Production companies are in a holding pattern for now," said Eric Lee, analyst at Citi in New York. "It could be the beginning of the flattening of the decline in the rig count."

The U.S. rig count has proven a conundrum for traders and analysts, but it is vital for global oil markets that have been flooded by oversupply this year in part because of overwhelming U.S. production.

U.S. drillers were forced to scale back after oil prices fell 60 percent to near $40 a barrel in January from more than $100 a barrel last June. Last week, rigs fell to 813, according to a weekly survey conducted by oil service firm Baker Hughes, the lowest number since 2011.

U.S. companies remain nervous about oil prices. Spending has been cut as prices fail to rebound significantly, and further price drops could quickly lead to more shrinkage in the rig count. Oil prices were around $50 on Wednesday.

But signs have emerged that the rig count slowdown is easing as energy firms take stock before removing their most efficient rigs in core producing areas that cost less to produce. While the oil rig count has not risen in months, the count shrank by just 12 last week, the smallest drop this year.

The next report will be released on Thursday.

"We think 1,000-1,200 rigs will keep production steady. With 800 rigs, we should see production decline in the second half of the year," said Francisco Blanch, analyst at Bank of America. "We might see a little more rigs lost, but the majority of the fall is behind us."

According to Baker Hughes, oil rigs in the Permian Basin of Texas, one of the country's largest oil deposits, fell last week to 283, the lowest level since basin-by-basin records began in early 2011 and down from over 560 in November. In the Williston Basin of North Dakota, oil rigs are at 97, also the lowest since 2011, down from nearly 200 in November.

In both regions, however, the decline slowed last week.

So far, U.S. oil output remains strong and continues to contribute to a huge glut in supplies worldwide, in part because a drop in production generally lags a drop in drilling but also because rigs are more efficient now than even a year ago.

Source: www.reuters.com

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