NEW YORK (TheStreet) -- With the plunge in oil prices, production growth in the U.S. is expected to slow this year, as some oil companies cut their capital-spending plans. That may cause the price of crude to rise.
Baker Hughes (BHI) , an oil-services company, said that the number of North American oil rigs dropped to 1,676 at the end of last week, a decline of 12.7% from early December, when the rig count was 1,920.
At Eagle Ford -- a shale rock formation in Texas, which has been producing around 1.6 million barrels of oil per day, or almost 18% of the output in the U.S. -- the rig count as of Jan. 22 was 235, a drop of 26 rigs over a four-week period. That should lead to less production during the next several quarters from companies that operate in the formation such as Anadarko Petroleum (APC) - Get Anadarko Petroleum Corporation Report , Chesapeake Energy (CHK) - Get Chesapeake Energy Corporation Report and Marathon Oil (MRO) - Get Marathon Oil Corporation (MRO) Report .
Even though producers' cost of production is around the current oil price, companies look at the marginal cost of production, which is the cost of producing the next barrel of oil from the last operating rig. As companies reduce the number of costlier operating rigs, the average production cost is likely to fall, which would enable companies to still be profitable, even with the current oil prices.
Meanwhile, some oil companies have cut their capital-spending plans for 2015. ConocoPhillips (COP) - Get ConocoPhillips Report reduced its capital-expenditure budget by 20%. Apache (APA) - Get Apache Corporation Report has cut its capital-spending budget by 26% in North America. Continental Resources (CLR) - Get Continental Resources, Inc. Report lowered its capex for 2015 by 12%, and Freeport-McMoRan Copper & Gold (FCX) - Get Freeport-McMoRan, Inc. (FCX) Report has reduced its capex plan for its oil-and-gas operations to $2.3 billion from a previous estimate if $3.5 billion.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.