World Oil editorial: Oil market meltdown—what does it take to get action?

An editorial by WorldOil.com

As this editorial is being written, the global oil market is having its greatest meltdown ever, save none. On Monday morning, oil has fallen to a record post-1973 level, lower than 1986, in both nominal and constant-dollar terms. Those who tried to sugar-coat the current downturn, by saying it wasn’t as bad as 1986, now look quite foolish, indeed.

So, this brings the question: What does it take for both U.S. federal and Texas state regulators to intervene and take action? There has been enough diddling around for weeks on end by both groups. Now is the time for action—the U.S. domestic industry—save for the very largest operators and API, who keep insisting that the illusionary free market is going to take care of things—is at stake. We need both prorationing on the state level in Texas, and a tariff on imported oil on the U.S. federal level. Nothing short of this is going to be enough—not when oil price futures have now plunged to literally less than nothing.

Two factors are working to keep supply way too high. First, because the OPEC+ agreement does not go into effect until May 1, Saudi Arabia feels that it is free to continue to overproduce. And these irresponsible actors in Riyadh are happy to do so, because, in the short term, they think that they can force quite a few U.S. producers into bankruptcy or severely wounded condition in the next two weeks. And if they succeed, and U.S. oil output falls sharply, then it’s all the more market share for KSA.

Second, the Coronavirus pandemic has cut down global oil demand by somewhere between 25 MMbpd and 35 MMbpd. Yes, the downturn is temporary, but it’s going to be long enough to do real damage. And even though state and federal officials are looking to begin opening up the U.S. economy in another two weeks, the pickup in demand is going to be slow. People are not going to jump onto airplanes immediately, nor are they going to start taking long driving vacations, not with the fear of going into other states, where the rate of virus might have been higher. Also, the demand for products made from petrochemicals is not going to ramp up overnight. We could cite other factors, but you get the picture.

The ongoing carnage. For the last two months, the U.S. E&P sector has been deteriorating, and since mid-March, when most of the country began working from home, the carnage has been intensifying. Already, we have had one significantly sized independent shale player, Whiting Petroleum (in the Bakken), go into bankruptcy protection. And more are likely to follow, especially after today. Some of the likely victims, we’re sorry to say, may include California Resources Corporation, Chesapeake Energy, Denbury Resources, Oasis Petroleum and Ultra Petroleum.

Additional operators that are under stress include Continental Resources (Bakken, Permian basin and Oklahoma), Devon Energy (Permian, Eagle Ford, Oklahoma and Wyoming), and Hess (Bakken and offshore, GOM). And there are countless hundreds upon hundreds of additional medium- and small-sized operators in peril.

Then, we have the equipment/service sector, where the layoffs have been large and are increasing. On April 16, Weatherford announced that it would lay off 15% of its 24,000-strong workforce, equal to 3,600 people, while also reducing executive pay 20% and putting other employees on pay cuts.

On April 7, Halliburton said that it would lay off at least 600 employees in Texas and Oklahoma, of which 350 would be in the latter state. Back on March 18, Halliburton furloughed 3,500 employees in Houston, where they work one week on, one week off, for up to 60 days. And in its Fort Lupton facility in Weld County, Colorado, Halliburton “permanently” laid off 130 workers. This follows the laying-off of 178 employees last October at another Colorado facility in Grand Junction.

On April 9, Schlumberger said it would furlough employees, modify work schedules and cut executive pay 20%. There were no specific numbers cited, but you can bet that the numbers are quite significant.

Meanwhile, on April 15, Baker Hughes laid off more than 200 people at an Oklahoma facility after saying two days earlier that it would cut capital spending by more than 20% from 2019 levels and write down the value of $15 billion of assets as part of its first-quarter financial performance.

Rounding out the top five equipment/service players, NOV had multiple layoffs in the back half of last year. One has to wonder what additional steps are being taken or will be taken. We could cite many more mid-sized and niche players in the equipment/service sector, but again, you get the picture.

Moving forward. Obviously, something needs to be done quickly, to protect the U.S. E&P industry. Back in the 1986-1989 period, nothing was done to get the price up and stabilize activity, save for the Reagan administration jawboning the Saudis to ease up on oil output. But, this happened only after senators from oil states yelled at Mr. Reagan to stop the bleeding. The ironic part of that situation was that the Reagan people encouraged KSA to over-produce, because they wanted to destroy the hard-currency earnings of the Soviet Union. The Saudis, eager to gain market share, were quite happy to help. The result was large-scale layoffs, and many people left the industry, never to return, creating an experience and skills gap that lasted many years. And it took 19 long years, until August 2004, for oil to regain the value in constant dollars that it had in late 1983. All through the 1990s, the industry, so to speak, slogged through the wilderness. We don’t have that kind of time now.

Within 24 hours of this editorial being posted, the Railroad Commission of Texas will once again pick up the question of whether to implement prorationing at its latest open meeting. Last Tuesday, April 14, the three commissioners heard testimony from some 50 operators, associations, consultants and think tanks. One would hope that today’s oil market performance will force some action out of the RRC. And one also would hope that President Trump takes a couple of hours’ attention away from Covid-19, long enough to impose a tariff on imported oil and take other concrete steps. The situation demands it!