Houston Chronicle

$40 oil has industry on the ropes

Stocks plunge as China slowdown continues

- By Robert Grattan and Rhiannon Meyers

U.S. oil fell below $40 per barrel for a time Friday, and U.S. stocks fell sharply for the second straight day as China’s slowing economy reverberat­ed across the globe.

The drop in oil prices continues to shake the Houston economy, portending more layoffs and budget cuts as analysts say there’s no sign of a quick turnaround. Oil and gas companies hoped they had found price stability earlier this year when crude prices hovered around $60 per barrel for several weeks.

“We’re primed to lose more workers out of the oil patch,” said Karr Ingham, a petroleum economist. “More rigs are going to have to be sidelined, activity levels are going to fall yet further.”

U.S. stock markets plummeted after a report showed China’s manufactur­ing sector was struggling despite the Chinese government’s efforts to shore up banks and businesses. The Dow Jones Industrial average fell 531 points to 16,460.

Week-over-week oil prices fell for the eighth consecutiv­e time — the longest weekly losing streak since 1986 during an

oil bust that maimed Houston’s economy for years.

The march to new sixyear lows has been on the horizon since July, when a still-growing surplus of oil and darkening prospects for global economic growth renewed the slide in oil prices.

The resumption of the price swoon sends a signal that producers no longer can keep the taps wide open and hold out for a return to higher prices.

“If you stay at $40 very long, the industry begins to hurt quite a bit more,” said R.T. Dukes, an analyst at Wood Mackenzie.

Lowest since 2009

West Texas Intermedia­te crude, the U.S. benchmark, touched $39.86 per barrel around noon Friday before settling down 87 cents at $40.45 per barrel, its lowest closing price since March 2009.

Brent, the internatio­nal standard, fell $1.16 to $45.46, also its lowest since March 2009, in European trading.

U.S. benchmark crude sold for $93.96 on Aug. 21, 2014, and for more than $100 earlier last summer. It plunged to $43.46 in March before beginning a spring rally that now clearly has ended.

Prices have fallen on a surge in U.S. production from shale formations that boosted domestic supplies, while the Organizati­on of the Petroleum Exporting Countries kept its production up to maintain market share rather than cutting back to support prices as it sometimes has in the past.

Houston’s energy sector was already smarting from the sting of lower crude prices, but the fresh plunge delivered another shock, said Bill Gilmer, who directs the Bauer Institute for Regional Forecastin­g at the University of Houston.

“The attitude has certainly turned ugly in oil markets,” Gilmer said.

An extended crude rout spells more trouble for Houston’s oil and gas companies, which will need to make fresh cuts to their 2016 spending plans.

Exploratio­n and production companies that had been hoping for a recovery may start issuing pink slips to workers they had furiously sought to hire during the boom years. Oil services contractor­s including Halliburto­n and Schlumberg­er that laid off thousands of workers earlier this year could cut even deeper.

“This was inevitable,” said Rusty Braziel, president of Houston-based energy analyst group RBN Energy. “Better tighten your belts and be prepared for relatively low prices over the long haul.”

China’s impact huge

The same set of factors that have been driving prices lower since July weighed on traders Friday.

“(China’s) stock market problems, their currency problems, all these are signals that they are having a general slowdown,” said Arthur Gelber, founder and president of Gelber & Associates. “That will cause a lot of shaking and quaking in Houston.”

The economic news out

of China, the world’s second-largest oil buyer, has forced analysts to lower their estimates of how much oil the world needs.

Global demand is still growing but not fast enough to soak up the flood of oil headed to market each day.

Daily demand grew by 1.8 million barrels in the first half of 2015 and the world will use 1.45 million barrels per day more in the second half, according to energy investment bank Simmons & Company Internatio­nal,

But those gains have been offset by OPEC’s rising production, mainly in Iraq and Saudi Arabia. The 12-member oil cartel boosted production by 1.5 million barrels per day in the first six months of 2015.

“They’ve effectivel­y pushed the recovery back by a year,” said Jeff Dietert, an analyst at Simmons & Co.

Falling oil prices have forced U.S. producers to haul less crude to the surface, but not enough less to offset the oversupply.

Domestic oil production fell by 100,000 barrels per day from June to July and will continue its contractio­n for at least another year before picking up steam again in late 2016, the U.S. Energy Informatio­n Administra­tion estimates.

‘Survival hedging’

But new technologi­es and more efficient drilling have allowed oil companies to squeeze more from of the ground at a lower cost, and many will keep drilling if they can still take their oil to market at a profit.

Some small U.S. drillers are enjoying a modest boost from hedging strategies that locked in higher prices earlier this year, said Wil Harris, senior vice president at oil adviser Asset Risk Management.

“We had an extremely busy May and June when we started rallying,” Harris said. “It was survival hedging.”

The boost helped U.S. drillers put two oil rigs back to work this week, the fifth consecutiv­e weekly gain, according to the weekly rig count by oil field services company Baker Hughes.

That brought the nation’s fleet of oil rigs to 674, up by 46 from the year’s low in late June.

Eventually, the oil industry will need to return to higher prices, either through an uptick in demand or decline in supply.

“The U.S. oil and gas business does not fundamenta­lly work at $40,” said Bobby Tudor, chief executive at Tudor, Pickering, Holt & Co. energy investment banking firm in Houston.

Oil companies need to fetch at least $55 a barrel to grow and turn a profit, he said, But the battered energy sector should brace itself for prices that could tumble as low as $33 per barrel before they head higher, Tudor said.

Newspapers in English

Newspapers from United States