Oil tops $40, but threats remain
Optimism tempered by bankruptcies, ongoing pandemic
Oil closed above $40 a barrel Monday for the first time in more than three months, providing another sign of optimism as Houston’s energy-dependent economy tries to claw its way back from the coronavirus-driven oil crash.
Oil rose 3 percent to settle at $40.46 a barrel, propelled by growing demand for petroleum products as more states lift coronavirus-related restrictions on business and travel. In two months, a barrel of crude has recovered by nearly $80, making a 180-degree swing after plunging to a record-low minus $36.98 on April 20.
“We’re in a better place now than many of us thought even a month ago,” said Karr Ingham, a petroleum economist with the Texas Alliance of Energy Producers. “At $40 oil, we’re a whole lot closer to keeping smaller operators in business. Their chances for survival are vastly improved.” But hardly assured.
Oil at $40 a barrel still poses a challenge for most shale producers, which typically require $50 to $60 a barrel to turn a profit. The steep cuts to production, spending and employment by energy companies portend prolonged pain for the industry, which faces another wave of bankruptcies.
In addition, no one is certain whether a second wave of coronavirus cases will depress economic activity and with it, energy demand and prices. Several states, including Texas, have seen sharp spikes in cases in recent weeks, raising the risk that oil markets could slide.
“The demand risk is still very much real,” said Jennifer Rowland, a senior energy analyst with
Edwards Jones, an financial research firm.
The industry also faces a longterm risk that the pandemic might forever transform the way the world conducts business and consumes energy, Rowland said. For example, if more people work from home, both commutes and gasoline demand would be reduced.
“We could find ourselves with permanent crude demand loss,” she said. “It’s too soon to know.”
Nevertheless, analysts said $40 oil is a significant milestone for an industry recovering from the second oil bust in six years and an important psychological booster for energy companies, some of which have begun restarting oil and gas production on wells that were shut in, or closed, a couple of months ago.
Analysts have been surprised by the pace of oil’s recovery. Most economists, including Ingham, had predicted oil prices would climb back to $40 later in the summer or fall as more office workers and students returned to their respective campuses. The most dire
prediction of the pandemic — running out of space to store the glut of oil — never came to pass.
At $40 a barrel, most shale companies are covering the cost of operating existing wells, and some of the most efficient operators are restarting production. Concho Resources and Parsley Energy are reopening existing wells while ConocoPhillips and EOG Resources said they are looking to increase production in the third quarter.
Most shale producers, however, will still have to cut costs significantly to operate at $40 a barrel, Rowland said.
“Companies can’t grow at $40,” Rowland said. “They can sustain and survive, but it’s not a price level where they are going to be growing and viable for the long term.”
It will take sustained oil prices in the $50-$60 range for energy companies to feel confident to start drilling new wells, analysts said. The U.S. rig count has fallen 15 straight weeks to a record low of 266 rigs in operation, according to Baker Hughes, a Houston oil field services company.
The rig count, a leading indicator of U.S. oil and gas production, has plunged by more than 60 percent
since mid-March and by more than 72 percent compared with a year ago, when there were 967 rigs in operation. The count is well below the bottom of the last oil bust in May 2016, when there were 404 operating rigs nationally.
“I don’t see the industry adding new rigs to any great degree at $40,” Ingham said. “It’s more about restarting wells that were shut in. That’s the first domino to stand back up due to rising prices.”