By Hugo Dante
ABA Economic Research Associate
Energy prices are rebounding from historically low levels. In the face of declining demand due to a global pandemic and in the midst of a price war between Saudi Arabia and Russia, West Texas Intermediate crude futures went negative for the first time ever, trading as low as negative $40 per barrel, as expectations for the cost of storage exceeded the value of a barrel of crude oil. Despite recent rebounds in energy prices—WTI is currently trading around $38 per barrel—the energy sector, especially domestically, is still reeling from recent turmoil and continues to face pressure in the short and long term.
In the short term, demand will continue to be a drag on energy prices. In the most recent BEA release on personal income, we see a further deepening in the decline in personal consumption, reflected by moderate deflation even despite historically low oil prices. Even as lockdowns and restrictions start to be lifted, it is likely that travel demand will remain subdued. According to the U.S. Energy Information Administration’s Weekly Petroleum Status Report, the four-week moving average for U.S gasoline consumption dropped as low as 6.4 million barrels per day, almost 50 percent less than the previous five-year average, although it has started to show some signs of recovery in rising gas prices.
Other factors will continue to suppress energy prices in the long term. Energy futures dipped into the negative earlier in the crisis due to mass stockpiling. Global oil storage was expected to reach capacity by May as a result of historically low prices and suppressed demand. However, despite some upticks in consumption and signs of recovery drawing on reserves, oil stores remain historically high. According to information from the EIA, working gas in underground storage in the contiguous U.S. is now more than 42 percent higher than it was a year ago, and stores are almost 20 percent higher than the previous five-year average.
Stubbornly low prices could spell longer term trouble for producers and the economies of oil producing states. According to an estimate from 2016, U.S. crude oil production costs averaged $20-25 per barrel, with U.S producers averaging expectations for $54 per barrel in their 2020 capex plans. Production could remain unsustainable for many US producers. U.S. Secretary of Energy Dan Brouillette has indicated that U.S. oil production could decline by as much as 3 million barrels a day by the end of the year. Rystad Energy forecasts that this could lead to the elimination of up to 240,000 energy sector jobs.
The effects of low prices on production can already be observed as U.S oil producers significantly ramp down production. The number of rigs actively drilling in the U.S. reached the lowest point on record on May 15 with 339 active crude rigs, a more than 50 percent decline in the space of two months. In April, a record 26,300 oil and gas industry jobs in Texas were lost, the largest one month drop on record according to the Texas Workforce Commission. In the previous oil market crash of 2016, around 200,000 employees—or approximately half of the oil services jobs workforce—were laid off. With job losses already in the tens of thousands, it is likely the struggling energy sector will follow a similar course in 2020.
As the country starts to reopen and attempts to recover from the effects of the global pandemic, the outlook for energy producers remains dim and it is likely that factors in the short and long term will suppress recovery for the U.S. energy sector.
