Arctic blast has oil output from U.S. on hold
The Arctic blast wreaking havoc across Texas has caused the largest disruption to U.S. oil production in history, pushing crude prices over $60 a barrel.
U.S. oil production has fallen by a third, or an estimated 3.5 million barrels per day, after freezing temperatures immobilized well equipment, knocked out communications to remotely operated wells and made travel treacherous for oil-field workers looking to restart or repair facilities. Norwegian energy research firm Rystad said the U.S. production disruption was one of the world’s largest, eclipsed only by a Yemeni drone attack on a Saudi Arabia oil field in September 2019 that knocked out 5.7 million barrels per day of oil for several days.
The drop in U.S. production sent global crude prices soaring this week. West Texas Intermediate on Thursday settled at $60.52, down 62 cents,
“Remember how the market reacted when Saudi Arabia offered voluntary cuts of 1 million barrels per day? Well double that number and see what happens,” said Artem Abramov, Rystad’s head of shale research, referring to the oil price rally bolstered by Saudi Arabia’s voluntary production cuts in February. “It’s exactly the same market reaction now with the U.S., although the cuts are not voluntary.”
The Arctic blast brought one of the worst cold spells in over a half-century to the Permian Basin of West Texas, the largest source of U.S. oil production. Temperatures across Texas this week were about 40 degrees below average, with many parts of
the state approaching or hitting record lows. Some parts of the Permian Basin have been without power since Friday while other sections are experiencing rolling blackouts like the rest of the state.
Rystad projects that Permian oil output will average below 4.3 million barrels per day this month, the lowest level since May at the worst of the coronavirus-driven shut downs.
Oil and natural gas producers faced enormous challenges keeping operations running during the winter storm, said Todd Staples, president of the Texas Oil and Gas Association. The lack of power forced well operators to halt production while freezing temperatures rendered equipment inoperable.
Natural gas, used to generate most of the electricity in Texas, doesn’t freeze, but the water used in hydraulic fracturing does. The gas also contracts when chilled, causing a loss of pressure in the pipelines that move it from shale fields to market.
“There’s been power outages to systems up and down the supply chain that have disrupted the process,” Staples said Tuesday. “Hazardous travel conditions have limited accessibility to repair equipment and for service companies hauling water and sand to reach production sites.”
U.S. oil production is expected to return to normal levels within days after power is restored to well sites. The winter storm did not cause catastrophic damage to oil and gas operations, according to Bloomberg Intelligence, a market research firm.
Rystad also expects operations to resume quickly as soon as temperatures warm up in the Permian. The research firm warned however, that the potential for more freezing weather in the Permian makes forecasting the U.S. production rebound difficult.
“The situation is still foggy and it will take a few days for the market to realize the actuality of the disruption on crude and products balances,” Rystad’s head of oil markets Bjornar Tonhaugen said. “If temperatures rise slowly, some of the shut production can restart from the weekend, which would allow producers to start resuming flows by the end of the week — if they have power and at affordable prices too.”