Producer Spending Cuts May Shape Future Oil Price Rebound

NEW YORK -(Dow Jones)- A sharp reduction in spending by oil producers points to a rapid recovery for oil prices once the economic downturn begins to alleviate.

Oil prices are showing signs of having hit bottom, trading recently at $41.83 a barrel, close to where the market stood at the start of December.


The global economic downturn remains a heavy weight, however. Demand is still dropping worldwide, a fact that has quickly sapped energy from budding rallies.

Once demand stabilizes, oil prices could bounce back quickly. Cash-strapped producers have cut budgets faster and deeper than in past downturns, according to the oilfield services companies that are the recipients of much of that spending. The lack of investment is already speeding up the rate of decline in older fields, and delaying the start of new production. Service companies see a possible repeat of the last four years: During this period, prices rose to record levels as demand grew faster than new supplies, an imbalance that some in the industry attribute to a lack of investment during the previous downturn.

“In a world of a deeper recession in the West and sluggish growth in the emerging economies, it isn’t a relevant problem” that producers are cutting spending so drastically, said Bernard Duroc-Danner, chief executive of Weatherford International Ltd. (WFT), a major oilfield services firm, in a conference call. “In the world of recovery and stronger…growth, this isn’t a sustainable situation.”

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