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Oil prices could force over 500 rigs out of service

With oil prices nearly slashed in half from earlier 2014 prices, analysts are predicting that up to 550 drilling rigs will remain out of commission over the next few months.

Signs of a slowdown have rolled in quickly since last November when members of the Organization of the Petroleum Exporting Countries (OPEC) refused to cut any of their oil and gas production. Reuters reported that in Houston, Texas, the first oil industry layoffs have been announced. Also, realtors there are predicting a sharp decline of up to 12 percent in home sales next year.

Additionally, companies in the West Texas Permian Basin have begun the process of “cold stacking” their rigs. This is a process by which a production company releases or stops drilling operations for their leased rigs. Recently, oil companies cut 20 rigs in the Permian fields and well permits in the Eagle ford fell nearly 30 percent in November.

As reported by Fuel Fix , Wunderlich analyst Irene Haas wrote that some private producers “believe that there will be more than 500 rigs idling in the next 60 days.” This means more than a quarter of active U.S. rigs will be off the market soon.

“We think there’s a significant amount of pain coming” to the oil industry and its service companies next year, said Praveen Narra, an analyst with Raymond James. Any recovery in U.S. oil and gas production will likely take longer than usual in oil-price downturns because the decline was set off by a glut in crude supplies, rather than less demand, he said.

Narra noted that “the problem isn’t as quick of a fix as it would be if demand rebounded,” and service costs for rigs and other drilling tools would likely come down in price to compensate for the deterred activity.

Overall, the United States saw a 37 percent decrease in well permits between October and November. The depletion in new well permits was most notable in the three major shale plays including the Bakken formation, the Permian Basin and the Eagle Ford in South Texas.

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