Price climb gives oil firms breathing room
Crude closes above $50 a barrel for the first time in nearly a year
U.S. crude oil prices climbed above $50 a barrel on Tuesday for the first time in nearly a year, providing a measure of relief to companies that have survived the worst oil bust in 30 years and hope that a long-awaited recovery is finally taking shape.
Oil prices have nearly doubled since they hit a low of $26 a barrel in February, settling Tuesday in New York at $50.36, up 67 cents on the day. It was the first time prices have settled above $50 since July 2015.
“It’s a big milestone, 50 bucks,” said Jim Krane, an energy studies fellow at Rice University’s Baker Institute for Public Policy. “It’s one of those psychological barriers that’s been breached. If you’re a small oil company that’s barely hanging on, you’ll breathe a little easier tonight.”
While far from the heady days of $100 oil, $50 a barrel is at least a threshold at which many of the shale drillers that led the last boom can make money, analysts said. Already, rising prices are leading to increased activity among oil producers and their suppliers.
Last week, in response to rising oil prices, drillers sent nine rigs back to West Texas’ Permian Basin and other places — a tiny number compared to the 1,500 rigs sidelined during the bust, but nonetheless significant after months of declines that drove the number of operating rigs to record lows.
On Monday, Pioneer Natural Resources, a West Texas driller, said it planned to send five to 10 rigs back to the oil patch when crude prices reached $50 a barrel.
Meanwhile, a major U.S. drilling rig contractor, Helmerich & Payne, said demand from production companies for its equipment is finally picking up. “With oil prices over $45 a barrel and some confidence in the market, inbound calls have started to come in,” Helmerich & Payne, headquartered in Oklahoma, told investors earlier this week.
“There’s no doubt that higher prices are going to help immensely,” said Jamie Webster, a fellow at Columbia University’s Center on Global Energy Policy.
Supply disruptions
Crude prices have been rising recently amid supply disruptions caused by wild fires in Canada’s oil sands region and militant attacks in Nigeria, as well as falling U.S. production, which in May experienced the sharpest monthly drop since Hurricane Ike shut down offshore production in 2008, the U.S. Energy Department said Tuesday.
In addition, U.S. commercial stockpiles have dipped by over 1 million barrels in recent weeks, even as U.S. demand for gasoline reaches record levels, according to the Energy Department.
“This thing is coming back into balance much faster than some people thought,” said R.T. Dukes, an analyst at the energy research firm Wood Mackenzie.
Still few analysts expect a rapid recovery for the industry. Global markets remain awash in oil, with the Energy Department on Tuesday projecting that prices will rise slowly from here, averaging about $52 a barrel next year, far below the peak of more than $100 a barrel hit in June 2014.
Energy companies have shed jobs by the tens of thousands, with Texas alone losing nearly 100,000 jobs since the downturn began nearly two years ago, according to Texas economist Karr Ingham, who has tracked the state’s oil industry for years. More than 140 North American oil producers and their equipment suppliers have gone bankrupt since the start of 2015, including 75 Texas companies, according to law firm Haynes and Boone.
Need cash to restart
In addition, many of the companies that have survived remain short of cash and saddled with heavy debts, making it difficult to get the money they need to resume drilling.
“It’s going to take a while for the companies to get together their financial wherewithal,” said Ann-Louise Hittle, another Wood Mackenzie analyst. “We don’t think it’s going to be a quick ramp-up.”
But that could ultimately prove a benefit to the recovery. Last summer, oil prices returned above $60 a barrel, only to plunge as companies started pumping oil.
Some have predicted that the latest rebound in prices could lead to the same result, but others say that conditions over the past year have changed. Among those changes: Many more companies have gone out of business since last summer, curbing production.
Andy Lipow, president of oil consulting firm Lipow Oil Associates in Houston, said the surviving oil companies may well have made it over the wall. “The market feels a sense of a relief, that those who have survived will continue to make it through this low pricing period,” he said.