Crude’s rebound can’t dull sting of price bust
ECONOMY: Cautious optimism reigns as demand inches up
Oil prices appear to have bottomed out and are rebounding as drillers slash production and more states restart their economies after almost two months of coronavirus-related restrictions.
The price of U.S. oil increased for a fifth-straight day Tuesday, up 20 percent to settle at $24.56. Just a week ago, a barrel of crude cost about $12.
Meanwhile, the demand for gasoline, which plunged as Americans hunkered down at home to slow the spread of the coronavirus, has rebounded to its highest level since March 15, according to GasBuddy, which tracks gasoline prices.
“My sense is that we are climbing out of this crevice that we’ve been in and that the worst of the demand destruction has already occurred,” said Karr Ingham, a petroleum economist with the Texas Alliance of Energy Producers. “Prices are still bad, but you can see it with every passing day: More cars out and about and the slowly increasing number of flights.”
Crude’s rally offers a glimmer of hope for the Houston economy and the tens of thousands of residents whose livelihoods rise and fall with the price of oil. Analysts on Tuesday said they are feeling more optimistic that oil is on the rebound after falling to a record
low negative $36.98 on April 20. Even President Donald Trump on Tuesday tweeted: “Oil prices moving up nicely as demand begins again!”
To be sure, $25 oil is nowhere near the price needed for U.S. producers to be profitable, typically $50 to $60 a barrel. The low price and the pandemic-driven oil glut have crushed the bottom lines of companies throughout the industry. On Tuesday, Ohio-based refiner Marathon Petroleum said it lost $10 billion in the first quarter; Houston pipeline company Plains All American said it lost $2.8 billion; and Houston-based Occidental Petroleum $2 billion.
Furthermore, the dramatic spending cuts, thousands of layoffs and forced wage reductions throughout the industry will reverberate through the economy for months, even after oil prices recover.
Still, Ingham said he’s looking on the bright side: “$25 a barrel isn’t fantastic, but it’s better than minus $40 a barrel.”
Gas prices ready to rise
Consumers itching to get out of the house and take advantage of low gas prices will likely be disappointed as oil prices climb out of the trough.
Houston-area gasoline prices, which have fallen by more than a dollar a gallon over the past year, may be poised to begin rising after dropping to an average of $1.50 a gallon. Nationally, the average price increased for the first time in 10 weeks to an average of $1.75, according to GasBuddy.
“Prices in Texas may go a little bit lower, but you’re probably in the 8th or 9th inning of gas prices declining,” said Patrick DeHaan, an economist with Boston-based GasBuddy. “If demand continues to recover, gas prices will too.”
Meanwhile, the supply of oil will begin to decrease as producers stop drilling new wells and cap existing ones amid a glut of cheap crude. U.S. oil production has decreased by 1 million barrels a day since mid-March, according to the U.S. Energy Information Administration.
Diamondback Energy and Parsley Energy this week became the latest shale drillers to announce they were cutting production in the Permian Basin of West Texas.
Midland-based Diamondback, which lost $272 million in the first quarter, said it will cut production in May by as much as 15 percent and idle half of its rigs by October.
Austin-based Parsley, which lost $3.7 billion in the first quarter, said it has shut down about 400 wells and halted new drilling.
As the companies slow production, more workers face losing their jobs. Already, 43 energy companies have disclosed some 30,000 layoffs this year, according to a Houston Chronicle analysis of company filings and state employment notices.
“Oil bottoming out doesn’t signal an immediate growth in rig count and reverse the layoffs,” Ingham said.
An oil storage problem
Even if demand for oil recovers, oil prices will likely remain low for a prolonged period as consumers around the globe slowly use up the vast glut of oil, said Jennifer Rowland, a senior energy analyst with Edward Jones, an equity research firm.
There is so much unused oil around the world that producers and traders are having trouble finding places to store it. At one key storage point in Oklahoma, oil had filled up to 80 percent of capacity, according to the EIA. If producers run out of storage, oil prices could take another tumble, Rowland said.
“There’s still a massive inventory overhang to work down that’s going to limit crude prices for a good part of next year,” Rowland said. “I think there’s probably another year to 18 months of pain for the sector. You can take some level of comfort that the worst from a price standpoint and a demand standpoint is probably behind us, but unfortunately, that doesn’t mean that the pain is over.”