Plunge in oil recalls last bust
Price per barrel nears $50 as nations mull curbing production
Fears of a new oil glut gripped commodity markets around the world Friday, pushing U.S. crude prices toward $50 a barrel in an extended rout reminiscent of the last oil bust, which battered the Houston economy for more than two years.
Oil dove nearly 8 percent in New York trading, the worst single-day loss in three years. The U.S. benchmark crude, West Texas Intermediate, settled at $50.42 a barrel — the lowest level since October 2017. In London, the price of Brent crude, the international benchmark, fell below $60 for the first time in more than a year, losing nearly 7 percent.
The sell-off followed weeks of growing inventories, surging production, and signs of slowing economic growth and demand. The price of a barrel of West Texas Intermediate has plunged by one-third since its recent peak of $76.41 in early October.
The slide raises the stakes for the Dec. 6 meeting of OPEC, when the cartel and its allies, including Russia, will decide whether to cut production as way to curb supplies and lift prices. It also raises the question of how low prices can go — and how long they can stay there — before energy companies in Houston begin
cutting spending and jobs.
“Some operators are fine, and some are in trouble if oil drops much more,” said R.T. Dukes, an analyst with the energy research firm Wood Mackenzie in Houston. “Around $60 or above, the question is how much growth is possible. At $50 to $60, they have to rationalize spending best as possible, and below $50 it is how fast can they cut spending.”
Oil’s woes have spilled into other financial markets, as energy companies helped lead stocks lower Friday. The Dow Jones Industrial Average on Friday fell 179 points, or just under 1 percent, to 24,286. Shares of the nation’s biggest oil companies, Exxon Mobil and Chevron, fell nearly 3 percent and 4 percent, respectively.
The rout in oil markets will test energy companies’ contentions that efficiency gains, technological advances and financial discipline will allow them to make money at lower prices. Many companies built capital budgets, which fund drilling projects, on assumptions of $50 oil, and many say they can make money in the prolific Permian Basin in West Texas at prices well below that.
But lower prices could set back activity in less productive shale plays, such as the Eagle Ford in South Texas, and offshore oil fields, where the costs of drilling and transportation require higher prices to make a profit. The offshore sector had only recently begun to see signs of life after a downturn that lasted far longer than the onshore segment of the industry. No quick rebound
Tom Tunstall, an economics professor specializing in oil and gas at University of Texas at San Antonio, said he doesn’t expect prices to rebound quickly. He said it is unlikely that oil will return to $70 a barrel anytime soon.
“Eventually, two to three to five years from now, who knows,” Tunstall said. “But for now, there appears to be more than enough supplies to meet demand globally.”
Increased production and supplies have spurred a sudden shift in sentiment among traders and analysts and upended global markets. Less than two months ago, oil was racing higher amid concerns of looming shortages as the Trump administration’s sanctions on Iranian exports were set to take effect. Unrest in Venezuela, Nigeria and Libya threatened to keep more oil off the global market, and pipeline shortages in the Permian Basin were expected to slow production. Some analysts predicted $100 oil in a matter of months.
The Trump administration, however, granted waivers from the Iranian sanctions to some of world’s biggest energy consumers, including China, India and Japan, meaning far less Iranian oil is coming off the market. Drillers in the Permian have managed to keep increasing production, which is projected to reach 3.7 million barrels a day next month, and propel U.S. output to a record 11.7 million barrels a day, according to U.S. Energy Department estimates.
Russia and Saudi Arabia, the world’s second- and third-biggest producers after the United States, also have kicked up production, partly in response to the earlier concerns about shortages. Saudi Arabia recently reported to the Organization of the Petroleum Exporting Countries that its production surged this month to nearly 11 million barrels a day. Meanwhile, global economic growth, stung by higher interest rates, trade disputes and tariffs, is slowing, and with it, the demand for oil. Shades of 2014
As a result, stockpiles are growing. Commercial crude inventories in the U.S. have increased for nine consecutive weeks, according to the Energy Department. Oil inventories, which have added more than 50 million barrels in those nine weeks, are at their highest level in nearly a year, about 6 percent over the seasonal average.
For some analysts, these conditions recall the situation of late 2014, as global oil supplies were rising and OPEC was set to meet on production goals. Ultimately, OPEC decided not to curb production, sending prices into a free fall through 2015, not hitting bottom until early 2016, at just over $26 a barrel. Scores of companies went bankrupt; the Houston area lost more than 80,000 energy-related jobs, according to data from the Greater Houston Partnership, a business-financed economic development group.
“I feel like we are in an eerily similar situation to the 2015 market and have all the right conditions to repeat it,” said Ryan Dusek, director of derivative valuation at Opportune, an energy consulting firm in Houston.
But Leodoro Martinez, chairman of the Eagle Ford Consortium, a private-public partnership of energy companies, local governments and school districts in the region encompassing the Eagle Ford Shale, said drillers are not panicking. Companies have invested carefully, he said, not overextending themselves as they did in the run-up to the oil bust.
“Nobody is overreacting right now,” Martinez said. “In a couple of weeks it’ll go back, and everything will stabilize. That’s how they feel right now.”