Wuhan virus is crushing oil demand; climate change will kill it
The sudden drop in oil and natural gas prices caused by a virus in China only will cause short-term harm to Texas and the industry, but it presages tougher times to come.
Oil and gas companies barely were keeping their heads above water before the novel coronavirus emerged from Wuhan, China. Optimistic executives struggled to convince investors they could make money with West Texas Intermediate oil priced at $58 a barrel.
The price flirted with $49 on Tuesday, levels not seen in more than a year. The shale revolution has unleashed billions of barrels of new supply, and Texas companies are drowning in cheap crude.
Young oil and gas workers should consider this pullback a harbinger.
Traders have sent prices lower over the past few weeks after the Chinese government quarantined 50 million people, shuttered thousands of factories and told hundreds of millions to stay home rather than risk contracting the Wuhan virus. When people don’t travel or work, they don’t consume energy.
Chinese demand for refined products will be 1.2 million barrels a day lower in the first quarter of 2020 compared to the same period last year, according to IHS Markit, the commodities data and intelligence company.
Before the outbreak, IHS Markit analysts had expected a demand increase of 500,000 barrels a day. As a result, the world has almost 2 percent more oil than it needs, even after a Saudi-led OPEC-Russia alliance took 2 million barrels a day off the market last year to prop up prices.
The outlook is little better for natural gas. Texas producers have begun liquefying natural gas for export to Asia, particularly China. They were expecting a boost from President Donald Trump’s interim trade deal, which requires China to buy more LNG.
The factory slowdown, though, will shave Chinese de
mand for natural gas by 2 percent in the best-case scenario, according to commodities analysts at the Wood Mackenzie consulting firm.
“The coronavirus outbreak and its impact on Chinese gas demand could not have come at a worse time for the already oversupplied global LNG market,” research director Robert Sims said.
Every day that China fails to consume oil and natural gas is a day they will never make up. Market analysts at Rystad Energy predict the Wuhan virus could take 25 percent off expected demand growth globally for 2020, assuming the outbreak peaks now.
In the past, Texas oil men and women have looked to Saudi Arabia and OPEC to act as a swing producer, trimming their oil and gas production to dry up gluts and bring prices back to economically sustainable levels.
But OPEC and Russia, which control most of the world’s supply, have not yet agreed on what to do next. A technical committee has recommended cutting daily production, but Russia rejected the proposal. Russian Energy Minister Alexander Novak told the TASS news agency any cuts would be premature.
Russia, and to some degree OPEC, now sees the U.S. oil and gas industry as competition. U.S. producers are exporting an enormous amount of oil and gas, competing with OPEC and Russia for a share of the limited global market.
Since most members of the coalition are low-cost, government-directed producers, they can suffer low prices that bankrupt U.S. companies.
The U.S. Energy Information Administration on Tuesday predicted that American oil drilling would flatten out and natural gas production will drop due to the virus.
“EIA expects that travel restrictions in response to the coronavirus, along with the related economic slowdown in China, will reduce petroleum demand and keep crude oil prices below $60 per barrel through the first half of this year,” EIA Administrator Linda Capuano said.
Slower drilling and less production are bad news for our state’s economy, which relies on oil and gas to keep the so-called Texas Miracle alive.
The good news is that the Wuhan virus crisis is temporary. Public health authorities will get a handle on the outbreak, and China will reopen for business and consume U.S. oil and gas. The more important question is, for how long?
Every nation in the world except the United States is taking aggressive steps to consume less oil and gas. New technologies are reducing the costs of renewable energy, and new batteries and nanotechnology promise to radically reduce oil and gas demand.
If shaving 2 percent of global demand for just a few months can cause such havoc, imagine what long-term demand destruction will do? That’s the question every young person considering a career in oil and gas should be asking.