Dallas Fed: Oil industry recovery years away

The U.S. oil industry may not fully recover from the COVID-19 economic downturn until 2022, according to the Federal Reserve Bank of Dallas.

The energy sector has climbed back somewhat from the historic collapse in oil prices and demand earlier this year. But a resurgence in COVID-19 cases and slowerthan-expected economic recovery is bogging down its recovery.

“It’s going to take time for demand for oil products to come back,” said Pia Orrenius, a senior economist at the Dallas Fed. “Even with a vaccine, by the time you get a vaccine distributed, and you get businesses beginning to plan business travel and households and families begin to travel, it’s going to take a while to ramp back up.”

U.S. oil producers were projected to produce 13million barrels of oil per day prior to the pandemic. But with oil prices steadily hovering around $40 per barrel — down from around $55 dollar per barrel at the beginning of 2020 — oil production may not reach 11 million barrels per day until the end of 2021, the Dallas Fed reported.

The International Energy Agency, meanwhile, projects global energy demand will not reach pre-pandemic levels until between 2023 and 2025.

Yet, the number of oil and gas rigs in operation has inched up in recent weeks, one sign that oil production could pick up in the coming months.

The rig count last week increased to 282, up 13 from the week prior. In the Eagle Ford Shale in South Texas, 16 rigs are in operation, an increase of three in the last week, according to oil field services firm Baker Hughes and Enverus, an energy research firm.

Still, therewere nearly 800 rigs in operation in the U.S. in January.

“It means hopefully that we’ve bottomed out in terms of production in Texas in the energy sector,” Orrenius said. “But does it mean we’re out of the woods? No, I don’t believe so, because we need demand to recover.”

Crude oil prices bumped up over the summer as people began traveling more following the economic paralysis in April and May — though the price per barrel has stagnated over the last month.

“Unfortunately, the demand recovery has since lost momentum, and (West Texas Intermediate crude) is currently struggling to tread water” at $40 per barrel, wrote analysts at Austin-based Enverus.

They expect the price of oil to remain around $35 per barrel through early 2021.

In previous downturns, oil and gas firms could readily get funding from investors who sawan upward trajectory for the worldwide demand of crude oil. But energy firms haven’t made enough money for Wall Street investors in recent years, and before the pandemic many firms already had trouble securing financing.

“Investors ... are driven by increasing interest in renewables and declining interest in carbonbased fuels, so that’s a big problem,” Orrenius said. “Certainly, the pandemic hasn’t made it easier.”

Texas oil and gas companies laid off 61,000 workers this year through June, according to the Dallas Fed.

Oil field services giant Schlumberger earlier this year said it was cutting 21,000 jobs, and the company recently reported a loss of $82 million for the third quarter. Pioneer Natural Resources Co., based in Irving, laid off 300workers at the beginning of the month.

Corporate lawfirm Haynes and Boone reported that 40 oil and gas firms in the U.S. have filed for bankruptcy as of Sept. 30.

The financial pressure will likely drive more companies into bankruptcy or to seek acquisition, said Ed Hirs, an energy economist at the University of Houston.

“We’re going to see layoffs — A — because of bankruptcies, and — B — because of further consolidation,” Hirs said, referring to ConocoPhillips’ announced $9.7 billion acquisition this week of Concho Resources.

Most oil producers surveyed by the Dallas Fed said oil prices would have to reach at least $51for the rig count to increase substantially. The expectation is that demand will stay low as cases of COVID-19 grow. But with the production of oil significantly curtailed, some in the energy sector argue a slight increase in demand could swiftly boost oil prices.