Australian mining giant BHP just told the market exactly why oil prices are going lower

oil well

Oil prices have been volatile of late, but a number of banks and commenters have said that oil prices are going lower.

In its half-year earnings release on Monday, Australian mining giant told the market exactly why:

In response to weaker prices, [BHP] will reduce its Onshore US operated rig count from 26 at period end to 16 by the end of the 2015 financial year. The majority of the revised drilling program will be focused on our liquids rich Black Hawk acreage with activity in the Permian and Hawkville limited to the retention of core acreage. The Company’s dry gas development program will be reduced to one operated rig in the Haynesville, with a focus on continued drilling and completions optimisation ahead of full field development. The reduction in drilling activity will not impact 2015 financial year production guidance and we remain confident that shale liquids volumes will rise by approximately 50 per cent in the period.

So what BHP is saying here is that while it is going to shut down a number of its oil rigs this year, production isn’t going to decline, doing little to change the market dynamics that have led to the oil price crash.

The general thesis for lower prices is basically this: lower prices have resulted from an oversupply of the oil market. Meanwhile, oil production from OPEC and the US shale markets hasn’t slowed down at all.

And so even with US rig counts plummeting in the US over the last few months, production figures haven’t been tempered, as BHP’s announcement makes clear.

In its earnings announcement, BHP also said that it expects to reduce its capital expenses in its US oil drilling program by 15% to $3.4 billion in 2015, with these expenses expected to fall further to $2.2 billion in 2016.

Back in January, BHP said it would shut down 40% of its US shale oil rigs by the end of its fiscal year.

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