The oil price crash got so bad that Jim Wilkes, president of a small, private Texas shale producer, felt relieved Monday as prices surpassed $30 per barrel for the first time since mid-March.
“I am feeling a little better now that the price is up over $30 per barrel. That’s pretty nice compared to where we had been,” Wilkes told the Washington Examiner, remembering when U.S. benchmark oil prices briefly dropped below zero last month after trading at around $60 per barrel at the start of 2020.
Wilkes’s company, Texland Petroleum, which has about 1,200 wells in the Permian Basin and employs 73 people, shut down all its production May 1 after multiple customers for his crude canceled or curtailed purchases.
But now, Wilkes is planning to restore some production he shut down starting June 1 and hopes to revive two-thirds of the oil Texland Petroleum once produced.
Texland Petroleum won’t get all the way back, but Wilkes is optimistic his company, which has been in business since 1973, can withstand this downturn, the worst of them all, as it has others in the past. He’s not currently planning to fire anyone because he received a loan from the Small Business Administration’s Paycheck Protection Program that allows him to pay employees for two months.
“I don’t know how it’s going to go,” Wilkes said. “I don’t think anybody knows. I don’t expect this to be a smooth, steady recovery. I would expect it to be somewhat up and down.”
Texland Petroleum is typical of hundreds of independent oil companies that helped propel the shale boom and are now grappling with an uncertain future: Demand for oil may never return to the 100 million barrels per day the world once consumed.
The beginnings of the oil market recovery have been spurred by driving in the United States and Europe picking back up as countries and states emerge from confinement. China, where the pandemic originated, is returning to normal oil consumption levels as its economy reopens.
Also helping the oil price rally are production cuts, including government-driven cuts by Saudi Arabia, Russia, and other OPEC-plus countries, along with reductions by companies in countries such as the U.S. and Canada.
But the recovery is still fragile, with the potential for outbreaks of the virus and long-term questions about people’s transportation habits. It’s unrealistic to expect oil demand to return to pre-pandemic levels this year because the world economy is almost certainly in a recession and could fall into a mild depression, said Ed Morse, global head of commodities research at Citigroup.
“It’s clear the worst is over,” Morse told the Washington Examiner. “But there is no indication this is something the world will escape from before the end of the year. Without anybody knowing what likely demand growth is going to be, we won’t get back to last year’s level as quickly as people think.”
Some companies, like Texland Petroleum, can break even with a $25-per-barrel oil price, the minimum level a producer needs to meet its expected spending needs.
Morse, however, projected most companies won’t restore production from shut-in wells unless oil prices stayed above $35 per barrel for more than a month.
Companies would need “a lot more than that” to commit to drilling new wells, he said.
Dan Eberhart, CEO of the oilfield services firm Canary, said that companies in his segment of the industry require a $45-per-barrel oil price.
“Thirty-dollar oil gives oilfield service companies the opportunity to drown in 20 feet of water instead of 40 feet of water,” Eberhart, a donor to President Trump, told the Washington Examiner. “It will help some companies stave off bankruptcy, but we really need to see $45 oil to stabilize the industry.”
The oil and gas industry lost more than 40,000 jobs in April alone, mostly in oil and gas fieldwork, according to a new analysis released Monday by BW Research.
Ron Ness, president of the North Dakota Petroleum Council, an oil industry lobbying group in one of the hardest-hit states, said he was surprised at how positively he reacted to seeing oil pass $30 per barrel Monday.
“I am shocked at how good $32 per barrel oil looks after you have been at $5, $10, $17 for a while,” Ness told the Washington Examiner. “It’s a big step in the right direction.”
While some demand is recovering in North Dakota, Ness credits the beginnings of the oil market rebalancing to the “massive reaction” from companies that cut production in the state’s Bakken Shale basin due to low prices.
North Dakota estimates that producers shut down 7,500 wells and 510,000 barrels per day as of Friday. There were only 12 drilling rigs operating in the Bakken as of Monday.
“More than one-third of North Dakota’s production is sitting idle today,” Ness said. “That’s a lot of jobs and economic activity in this state.”
Ness said reaching $30 per barrel was the “easy hurdle,” but it would be “much more challenging” for prices to make it to $55 or $60 per barrel, a level that would drive oil producers to invest new capital in the Bakken.
“Thirty-dollars-per-barrel oil doesn’t cut it,” Ness said. “This oil is worth a lot more than that. It’s world-class quality oil. The economics don’t work for $30 oil.”
