Immediate moves by U.S. oil and gas players to slow activity amid unfavorable market conditions are expected to materialize as accelerated decline in U.S. Lower 48 supply by June or July, according to analysts.

“From a rig prospective you’ve already started to see significant laying off of rigs,” John Coleman, principal analyst for Wood Mackenzie, said on a recent webinar.

The energy consultancy expects 37% of the rig fleet will be laid down, representing a drop of nearly 280 rigs from January 2020 levels.

The U.S. oil rig count saw its biggest weekly drop since March 2015 in the week to April 3 when drillers cut 62 oil rigs, according to Baker Hughes Co.’s weekly report. The cuts brought down the total count to 562.

Wood Mackenzie forecasts the rig count will bottom out at about 480 in the third quarter and then stabilize. However, that “will not arrest U.S. supply decline but [would] stop acceleration of the decline,” Coleman said.

The outlook was delivered as operators followed through on plans to drop rigs and completion crews to save money. Unknowing when the battle for more market share by Russia and Saudi Arabia along with lower global demand growth due to coronavirus will improve to lift commodity prices, capex cuts have been ongoing.

By the firm’s estimates operators are reducing capex by 30% on average. This is on top of initial 2020 guidance indicating a 10% spending drop compared to 2019 levels.

“Analysis from our corporate coverage shows that year-on-year spending cuts of 41% are required across all cost categories including dividends to be cash flow neutral at US$35/bbl in 2020,” according to Wood Mackenzie.

Some companies—including Occidental Petroleum and Diamondback among others—have already returned to the cutting room, Coleman said.

Lowering costs from efficiency gains or squeezing more from oilfield service margins, like the price downturn of 2014-2016, seem unlikely this time, he added.

“Even looking at things on a half-cycle basis, less than 10% of assessed resource in the Lower 48 space breaks even below $35 WTI,” Coleman said. “On a full-cycle basis, none of it breaks even below $35 WTI.”

A barrel of WTI was trading at $26.62 just before midday April 6.

“The message here is that incremental investment and capital deployment in the U.S. at today's prices is very much out of the money,” Coleman continued. “Now, that gets further complicated when you think about how producers are going to respond in terms of shut-ins and future activity as hedging enters the mix, which clouds the true economic response to what markets are trying to force.”

He pointed out that the firm has seen single-digit realized prices regionally and at the wellhead across the Lower 48.

“Prices are already starting to push shut-in level economics,” he said. “You’ll start to see that really show up in supply declines starting in the summer months.”

Determining when and where shut-ins happen, however, is difficult to forecast.

“It’s not simply going below cash costs that drive a lot of those decisions,” Coleman said. “There’s a lot of regulatory or ancillary considerations around it.”

These include leaseholder agreements, abandonment fees, the ability to sustain some cash cost of production from a balance sheet perspective, he added.

As for exit rates, Wood Mackenzie anticipates a 900,000 barrel per day (bbl/d) exit rate decline for December 2020 compared to December 2019 along with a 1 million bbl/d decline from the expected peak, which Coleman said the firm believes occurred in February.

“Looking forward to 2021, the exit rate December 2020 to December 2021 is roughly an additional 500 KBD [thousand barrels per day] as we do expect price recovery into the back half of 2021 to marginally return rig additions back to the Lower 48 and arrest the rate of decline,” Coleman said. “Certainly not returning the space to growth, but at least slow the rate of descent of the decline curves, for a lot of this supply.”

Onshore