At a time they are already cutting jobs and weighed down by debt, American oil producers are bracing for the latest shock to hit world energy markets: the economic effects of the coronavirus outbreak on China and beyond.
Oil and natural gas producers have been suffering from low commodity prices for the past year and now expect a sharp drop in global prices for their products. As a result, they are preparing to slash investments in exploration and production. The price of West Texas intermediate crude, a key benchmark, fell below $50 on Monday, a 20percent decline in less than a month.
After recovering slightly Tuesday morning, the price fell further, ending the day at $49.61, its lowest level in more than a year. It appeared on track for a close Friday slightly above $50.
China buys only about 200,000 barrels a day of oil and refined transportation fuels from the United States, out of 8.5 million barrels of total daily U.S. exports. But oil is a global commodity, and benchmark prices are set on world markets, not domestically. Lower prices mean lower profits.
“It’s a blow,” said Steven Pruett, chief executive of Elevation Resources, a Texas oil company, “especially when you add this to the fact that we’re getting almost nothing for our natural gas, and oil prices are sliding from $55 a barrel to $50. Credit availability is already tight, and it’s going to get that much tighter.”
Those concerns reflect the growing influence China exerts on international energy markets.
Just a few weeks after the outbreak of the virus, daily Chinese oil demand is already down 20percent because of dwindling air travel, road transportation and manufacturing. Because China consumes 13 of every 100 barrels of oil the world produces, every oil company is being hit to some extent.
More than 50 million people are affected by a travel lockdown in Hubei province, the center of the outbreak, slowing gasoline consumption, while international airlines are rapidly scaling back flights, leaving a glut of jet fuel and diesel on global markets at a time petroleum supplies were already abundant and prices depressed.
For producers in places like Iraq and Saudi Arabia, that kind of price drop can mean a 10percent loss in profits. But in the United States, where the break-even price for the average oil well drilled in shale fields is far higher at roughly $45 a barrel, some producers could lose as much as 60percent of their profits, according to Michael Lynch, president of Strategic Energy and Economic Research.
“The big question is whether the Saudis will put oil in storage and wait to ride this out, and if not, everyone is going to see less money coming in,” said Lynch, who has advised OPEC in the past. “For the big guys like ExxonMobil and Chevron, it’s not a big deal. But for the small guys, they are going to be hurting, and you could see the number of bankruptcies rise sharply in the next few weeks.”
Forty-two oil and gas companies filed for bankruptcy protection in North America last year. Since oil prices plummeted in 2015, there have been 208 bankruptcy filings by producers, involving roughly $122 billion in aggregate debt, according to the Haynes and Boone law firm.
Oil prices have fallen despite the loss of up to 1 million barrels a day of Libyan exports because of political turmoil there.
A hastily convened meeting of the Organization of the Petroleum Exporting Countries and Russia, a possible prelude to a production cut, helped to stem the price slide, perhaps only temporarily.
U.S. oil companies had already tightened their budgets last year, with roughly 14,000 of 750,000 employees in the United States losing their jobs. In the past week, Exxon Mobil, ConocoPhillips and Chevron reported disappointing earnings because of low oil and gas prices and narrow profit margins.
A prolonged price collapse between 2014 and 2017 forced U.S. oil and gas companies to lay off more than 160,000 workers and roughly 100,000 in Texas alone.
Analysts point to the SARS epidemic of 2002-03 for clues. Asian jet fuel demand fell by 1percent in 2003 from the year before, after climbing an average of 7percent per year during the prior five years, according to Citigroup Global Markets research. Demand snapped back powerfully in 2004, and otherwise the effect on global oil markets was short-lived and modest.
But China has become a much more important engine to the world economy over the past 17 years, and medical researchers cannot be sure that the new virus will fade during warmer weather like the flu.
But while lower oil prices hurt producers, they benefit American drivers. The average national price of regular gasoline has dropped 12 cents per gallon over the last month, according to the AAA motor club. That is a break particularly for lower-income motorists, who tend to drive older vehicles that are less fuel-efficient and spend a higher percentage of their income on energy.
Refiners can buy and store cheaper fuels for the summer, when demand will be higher. Producers are not so lucky.
The Chinese virus is spreading as oil producers are preparing their 2020 exploration and production budgets, which they will announce over the next two months. When the year began, oil prices had stabilized between $60 and $65 a barrel after cuts in OPEC production targets. But with prices now roughly $10 lower, executives predict that the industry will have to adjust.
“People are going to have to drop rigs and scale back production growth,” said Scott D. Sheffield, chief executive of Pioneer Natural Resources, a major Texas shale oil producer. “The question is, how fast can the Chinese stop the virus from spreading and start picking up oil demand.”
Sheffield predicted that if oil prices did not go up soon, domestic shale oil production, recently expected to increase by 500,000 to 700,000 barrels a day this year, instead would be flat.
Other countries will come under pressure, too. Most of the 10 million barrels a day that China imports come from Russia, Africa and Iran and other Persian Gulf nations, and producers in those regions have already been forced to sharply discount their shipments.
“You have to be concerned when you see demand is going down and economies are faltering,” said J. Nelson Wood, chief executive of Wood Energy, an Illinois-based oil company with wells in four states. “And of course that has a direct impact on price.”
Source: New York Times