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Oil at $55 a barrel, down from $78 before Trump

inauguration

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US oil rig count expected to drop if crude stays below $60

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Tariffs will hike costs for steel and oil-drilling gear

By Arathy Somasekhar

HOUSTON, April 11 Reuters) -

President Donald Trump moved on his first day in office to

increase U.S. oil and gas production, but the country's oil

industry is actually starting to think about cutting output and

jobs due to a double whammy of higher crude output from OPEC and

on-again, off-again tariffs that have dented demand.

The U.S. is the world's largest oil producer, pumping some

13.55 million barrels per day, employing millions of workers and

generating trillions of dollars annually. Trump campaigned on

the motto of "drill baby drill," and the national energy

emergency he declared on his first day of office was designed to

make it easier for companies to increase production, while he

instructed officials to do everything they could to bolster the

industry.

Instead, the market has been rattled by a steep slump in

U.S. crude futures to near $55 a barrel this month from about

$78 the day before Trump was sworn in. Many companies say they

cannot drill profitably if oil prices fall under $65 a barrel.

New tariffs will make it more expensive to buy steel and

equipment, industry watchers said, which could further

discourage drilling unless oil prices rise substantially.

Oil markets, along with Wall Street, began a free fall on

April 2 when Trump announced the new tariffs on trading

partners. Shortly after, the Organization of the Petroleum

Exporting Countries and its allies in OPEC+ said they would

accelerate output hikes, pushing U.S. oil prices to their lowest

levels since pandemic lockdowns crushed demand.

The U.S. Energy Information Administration sharply cut its

estimate of U.S. crude prices to $63.88 per barrel for 2025 from

a prior forecast of $70.68 a barrel, citing global trade policy

and higher OPEC production. Global oil consumption for 2025 will

increase by 0.9 million barrels per day (bpd), 0.4 million bpd

less than EIA's prior forecast, the EIA said this week.

Even before the tariff-driven price fall this month, top

companies including Chevron ( CVX ) and SLB had

announced layoffs to cut costs.

"If prices get sub-$60 and stay there, we'll see a definite

drop in the rig count," said Roe Patterson, managing partner of

Marauder Capital, a private equity firm investing in U.S.

oilfield services sector.

"They've definitely opened the door for the OPEC countries

to gain market share here, and it's an inadvertent,

self-inflicted wound," Patterson said.

"It was counterintuitive for the administration to think

that oil companies would 'drill, baby, drill' when prices were

lower," he added.

The U.S. oil rig count stood at 506 at the end of March,

down by 382 rigs since 2018, which was the peak in the last

decade.

"If oil prices stay in the $50s, oil rig counts will

drop, and the drop could be more than just 10%, or 20%. If it

settles around $50 for a while, I wouldn't be surprised to see

the count drop by 50%," said Cam Hewell, president and CEO of

Premium Oilfield Technologies, which manufactures and sells

equipment that enables oil companies to drill wells faster.

BREAKEVENS CHALLENGED

Oil producers need a price of $65 per barrel on average to

profitably drill, according to a Dallas Federal Reserve Survey

of over 100 oil and gas companies in the Texas, New Mexico and

Louisiana region. That was a dollar higher than the price they

quoted in last year's first-quarter survey.

Average break-evens, or the cost of developing a new well in

the U.S., were just under $48 a barrel, according to research

firm Rystad Energy and Wood Mackenzie. Break-even rises to over

$60 a barrel once dividend payments, debt repayments, corporate

expenses and other costs are included.

"In reality, even a company operating on $40 breakeven

acreage would be inclined to slow down activity when prices fall

below $65 per barrel, as their level of dividend coverage would

be at risk," said Matthew Bernstein, a vice president at Rystad.

Many publicly traded companies have focused on capital

discipline and shareholder payouts over growth in recent years

after investors fled the sector due to years of weak returns.

While it may cost under $40 a barrel to drill in the best

parts of the Permian basin, new well drilling in North Dakota -

the third largest oil-producing state - would require oil prices

around $57 a barrel, according to Wood Mackenzie.

Operations in those basins would be more at risk at current

price levels, according to industry executives.

While break-even costs have eased from a high of $54 in 2024

thanks to efficiency gains, they were still about $15 higher

than the lows touched during the pandemic when oil service costs

fell.

The average price to cover operating expenses for existing

wells, or the price below which companies will look to shut in

production, was about $41 per barrel, up from $39 last year,

according to the Dallas Fed Survey.

"If oil does go into lower $60s (a barrel), or upper $50s,

public independents that are already capital disciplined are

going to have to cut their budget and cut rigs," said Bryan

Sheffield, founder of energy investors Formentera Partners and

former chief executive of producer Parsely Energy Inc.

INPUT COSTS RISE

Meanwhile, well costs are likely set to climb due to tariffs

on steel, as well as goods from China, a supplier of many key

parts used in drilling rigs and equipment.

"For the parts that we get from China, we have started

adding a line item in our invoices to account for the 20%

tariffs and largely expect to pass it along to our customers,"

said Hewell, adding that rapid hikes and variations in the

tariffs imposed were making the process hard for the company.

While companies have brought down some of the costs to drill

wells by reducing drilling time and fracking multiple wells at

the same time, those gains are expected to be limited.

"We may get a little more efficient and faster, but I think

the 'large leaps' in efficiency and technological improvements

have been generally accomplished for now," said Marauder

Capital's Patterson.