Oil enters 2019 on uncertain ground
Crude prices end year 25 percent lower than where they started, but ‘nothing catastrophic’ has occurred — yet
Higher oil prices, increased drilling activity, eyepopping merger and acquisition deals, record production, and one week as a net petroleum exporter. Then a 40 percent plunge in prices.
Oil markets and outlooks made a sharp turn in 2018, quickly shifting from predictions of global shortages and $100-a-barrel crude to concerns about increasing supplies, weakening demand and another oil glut. The uncertainty of where oil markets are heading was underscored in the final days of the year, when crude prices plunged 7 percent on Christmas Eve, surged 9 percent in the next trading day, Dec. 26, and slid again on Dec. 27.
Crude prices settled Monday at $45.41 a barrel, up 8 cents, but down $15 or 25 percent from 2018’s opening price of $60.42. It was the commodity’s first annual decline since 2015 — a slide that occurred in the last three months of the year after prices peaked at $76.41 a barrel on Oct. 2.
How long oil trades at these levels will not only test shale drillers claims that they can still make money below $50 a barrel, but also the strength of the energy industry’s recovery. Economists and analysts say that if prices hold below $50 for an extended period, the rebound could stall and slow Houston’s economy, which accelerated in 2018 after several years of subpar growth.
Already, some companies are revisiting spending plans based on earlier projections of prices at $60 a barrel — or higher. ConocoPhillips, for example, said it
Eve, the lowest settlement since the summer of 2017. means more U.S. crude will find its way to global markets in 2019.
The rapid increase in U.S. production appears to be among the miscalculations that traders made in late summer and early fall as they bid up prices. Many expected the shortage of pipelines, particularly out of the Permian Basis, to slow U.S. output as drillers cut back, rather than sell oil in West Texas, where supplies mounted, at discounts.
Analysts and traders also expected global supplies to dwindle after the Trump administration’s sanctions on Iranian crude oil exports took effect in the fall. The administration, however, granted waivers to some of the world’s biggest energy consumers, including China, India and Japan, meaning far less oil than expected came off the market. Meanwhile, anticipating potential shortages, Saudi Arabia and Russia boosted their production.
In December, Saudi Arabia, Russia and their OPEC allies agreed to cut production by 1.2 million barrels at the University of Houston.
“It’s a tremendous loss in terms of income taxes, tax generation for the communities,” Hirs said. “That more than dominates the benefits that consumers feel with lower fuel prices.”
Todd Staples, president of the Texas Oil & Gas Association, a trade group, said the slide in prices is a reminder that growth is not guaranteed in a global market influenced by supply and demand pressures from any number of sources.
“Companies have shown an unbelievable ability to adapt and adjust over the past few years,” Staples said. “Looking into 2019, you will continue to see companies merge, controlling costs, finding efficiencies and very importantly, continuing to invest in research and development. In order to maintain our competitive position, technology will continue to player an even bigger role.” Winners and losers
Lower crude oil prices are benefiting refiners, who can acquire their main raw material for less, consumers, who are paying the lowest at the gas pump. In Houston, the average gasoline price fell to $1.90 a gallon on Sunday, down 29 cents from the end of 2017, according to GasBudd
Record oil production and higher prices through most of 2018 should mean additional revenues for school districts, counties, the state and the endowments of the University of Texas and Texas A & M University. The Texas Comptroller of Public Accounts is expected to release figures in mid-January.
But Texas is producing 4.5 million barrels of crude oil per day and an extended run of low oil prices could undermine economic activity. A $20 per barrel price drop could shrink the state’s economic output by $32.9 billion a year, said Ed Hirs, an energy economist a day — a move that has yet to convince markets increasingly focused on a slowing global economy that could weaken demand. Oil prices continued to decline after OPEC disclosed its plans, falling as low as $42.53 a barrel on Christmas would not increase its capital budget in 2019. Producers in West Texas’ Permian Basin, such as Diamondback Energy and Parsley Energy, said they will run fewer drilling rigs.
Karr Ingham, a petroleum economist with the Texas Alliance of Energy Producers, a trade group, said the industry is more efficient that it was in 2014 and he doesn’t expect the kind of collapse that devastated the industry as prices plummeted from more than $100 a barrel to less than $30.
Unlike 2014, OPEC and its allies have moved to cut production and take more an 1 million barrels a day off the market. Prices appear to have stabilized after the recent sell-off.
“At this point, and I say only at this point, nothing catastrophic has occurred,” Ingham said. “I don’t think we’re poised to lose tens of thousands of jobs or anything of that nature. But what ultimately happens depends on what happens to prices from this point forward, and there are a lot of moving parts to that guesswork.” Record production
A key factor shifting the market outlook from shortage to glut was the resilience of U.S. oil companies, which, despite pipeline constraints and sliding prices, pushed output to new records. The nation began 2018 producing less than 10 million barrels a day. Last week, the Energy Department reported that crude production reached 11.7 million barrels a day.
In Texas, the home of the nation’s most prolific oil field, the Permian Basin, more than 1,000 companies filed nearly 13,300 original drilling permits with the Railroad Commission of Texas in 2018, a 5.5 percent increase from the previous year. Texas accounted for half the nation’s active drilling rings, which climbed to nearly 1,100 last week from about 900 at the beginning of 2018.
The surging output has made the United States the world’s top producer and allowed it to become — albeit for just a week in late November — a net petroleum exporter for the first time in at least 70 years. Texas ports are working to expand export capacity, which