Roughest quarter for oil coming: Former Shell exec

More pain for oil: Hofmeister
More pain for oil: Hofmeister

The recent leg lower in crude prices is no surprise, and market watchers should expect the oil rout to get worse before it gets better, former Royal Dutch Shell President John Hofmeister said Tuesday.

"I think the first quarter of next year is going to be probably the roughest quarter that the oil and gas industry has seen really in a long time," he told CNBC's "Squawk on the Street."

Globally traded hit an 11-year low and U.S. crude dipped below $34 in Monday's session, extending a price slide following OPEC's Dec. 4 meeting, during which the producer group declined to enforce production cuts.

The oil market is oversupplied by about 1.5 million barrels per day.

The current price environment will continue for some time so long as top oil exporter Saudi Arabia continues to tap its extensive reserves and borrow money to fund its policy of keeping oil production roughly steady, Hofmeister said.

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Oil markets can only achieve a more rational level of production when state-owned companies bring output in line with slower global fuel demand, he said.

But once a correction occurs, Hofmeister said, he is concerned the oil market will not achieve equilibrium, but instead enter a period of undersupply, ultimately resulting in a price spike.

That is because producers are destroying value as they race to cut costs to offset declining revenues, he said. The industry is "cannibalizing" parts from idled rigs and equipment, laying off workers and reducing inventories, leaving companies ill-prepared for an uptick in demand, he added.

Further, Hofmeister believes U.S. drillers will have a tough time borrowing money to fund new production.

The turning point in the supply-demand imbalance may be the decline in high-cost U.S. crude production, which is expected to fall by about 500,000 barrels per day next year, he said.

The U.S. Energy Information Administration projects the country's output will decline through the third quarter of 2016.

A floor hand helps line up a pipe while drilling for oil in the Bakken shale formation near Watford City, North Dakota.
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