Nearly two dozen countries agreed Sunday evening to reel in their oil production beginning in May to offset the glut in crude brought on by the coronavirus pandemic.
Spearheaded by leading producers Saudi Arabia, Russia and the U.S., the deal will remove 9.7 million barrels of oil from the market daily. But for Wyoming shale operators already struggling from meager prices for weeks on end, the multinational effort to stabilize energy markets may prove insufficient.
For one, oil prices failed to rebound Monday morning to the extent some analysts had predicted. West Texas Intermediate, the primary U.S. benchmark for oil, was below $23 a barrel, down from over $60 at the opening of the year. The realized price for oil in Wyoming sits even lower, making oil production in most cases a net loss.
Prices have plummeted in response to the spread of COVID-19 caused by the coronavirus and a global price war. As a leading oil producer, Saudi Arabia advised OPEC to cut back on oil production by 1.5 million barrels per day in early March in its initial attempt to help global oil markets rebound. Restricting oil production can sometimes help buoy prices.
But Russia, the third-largest producer of oil, did not agree to OPEC’s plan to curb production last month. In response, Saudi Arabia, whose relationship with Russia had been warming, slashed oil prices and ramped up oil production. The two countries continued to joust into early April, with Saudi Arabia vowing to keep up its oil production. The collateral damage from this dispute has largely landed on the doorsteps of American shale producers, especially independent ones, many unable to continue drilling when oil prices have plunged too low.
Too little, too late?
The most recent agreement struck between OPEC nations and others to curb drilling, though welcomed by many in Wyoming, may be too little, too late.
“Unfortunately, the cuts agreed to by the OPEC+ countries will do little to curb the drop in oil prices given the unprecedented decline in global demand due to COVID-19,” Ryan McConnaughey, communications director for the Petroleum Association of Wyoming, said in a statement Friday. “Until the threat of a continued pandemic is neutralized, and global economic activity begins to demand more petroleum products again, operators will continue to see depressed prices.”
In the meantime, several oil and gas firms with operations in Wyoming have announced workforce and capital expense reductions and shut in wells.
The state received 4,885 new claims for unemployment insurance for the week ending April 4, according to data provided by the Department of Workforce Services. That number doesn’t include the over 10,000 applications the department is still processing from previous weeks. The mining, oil and gas extraction sector shed about 332 jobs the week ending April 4, with a total of 775 unemployment insurance claims in that sector still being processed by the state.
For every dollar chipped off the price of oil, the state of Wyoming sustains an annual loss of $12.5 million, McConnaughey added. What’s more, for every rig shut down, roughly 100 workers will be displaced. The state’s active drilling rigs have fallen by 50 percent since February, going from 20 to a mere 10 rigs, according to the state’s Economic Analysis Division.
Though a deal with OPEC and other oil producers will likely provide some level of support to oil prices, countries first need to comply with the agreement, according to Steve Wood, managing director for the oil and gas team at Moody’s Investors Service. “Lower production volumes will partially alleviate the substantial excess supply of oil caused by the corona-induced demand shock,” Wood said in a statement. “However, the ultimate effect on oil prices will depend on the extent to which countries comply with their production cuts, as well as on the path of economic recovery and restored demand.”
Far off recovery
The severe zap in fuel demand for transportation and industrial activity worldwide during the pandemic has left oil prices in the dust.
“Even with an agreement in place, the demand decline has been so sharp, and so deep,” University of Wyoming economist Rob Godby remarked. “The problem is really the coronavirus. There is so much oil on the market right now, and so much to go into storage, that really the only way to slow this down is to actually shut in wells.” Shutting in productive wells can prove costly, and there’s no guarantee activity will return to Wyoming down the road, he added.
Steve Degenfelder, land manager at
welcomed the decision by OPEC to limit production, but noted the Casper-based company will still be facing challenges in the days ahead.
“We have shut in some high cost production and will consider more as time goes on,” he said.
A full recovery in energy markets appears far off, according to analysts.
Godby, the economist, said the state will be lucky if oil prices return to $40 in the next six months.
“What people are realizing is that it’s not going to be a short, sharp slowdown (for the virus),” he said. “This is probably going to be prolonged. You’re looking at two to three years for an economic recovery here.”
For Wyoming consumers, low oil prices have translated into cheap gasoline, with
just short of $2 per gallon. But residents’ efforts to limit any unnecessary travel to avoid catching or spreading the deadly virus leave few opportunities to take advantage of the discounts at the gas pump.
Follow the latest on Wyoming’s energy industry at @camillereports
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