(Bloomberg) -- The speed at which oil producers shut down wells spitting out their final drops of unprofitable crude may speed the drop in U.S. output and hold the key to an eventual rebound if prices fall further.
Crude prices tumbling to $30 a barrel would threaten the profitability of about 206,000 barrels per day of production from older wells that produce minimal amounts of oil, according to a report Thursday from Bloomberg Intelligence.
The wells, which are most prevalent in Texas’ Permian Basin, are about 25 years old on average and produce no more than 15 barrels a day. They require regular maintenance to help pump even that much after years of sagging pressure.
"These wells dance on the edge of profitability," Peter Pulikkan and William Foiles, analysts at Bloomberg Intelligence, wrote in the report. "The reaction of smaller mom-and-pop operators to sustained low oil prices will dictate how quickly uneconomic supply is removed from the market."
Stripper wells represent more than 80 percent of total wells in the U.S. and 12 percent of total production, according to the report. In total, they generate about 1.1 million barrels of oil a day, nearly as much as Algeria, the third-largest African crude producer.
The key decision will be whether operators continue to let the wells produce at losses to hold the lease in hopes that oil prices soon recover, or shut in production and potentially surrender the well, the analysts wrote. While most of the little wells are operated by tiny producers, the two companies with the greatest production from stripper wells are Chevron Corp. and Occidental Petroleum Corp.
West Texas Intermediate, the U.S. crude benchmark, has fallen by more than half since since June 2014 and closed as low as $38.24 a barrel in August. Today oil rose 3.2 percent to $46.54 at 10:10 a.m. in New York.
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Copyright 2016 Bloomberg News.
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