HOUSTON – Three weeks ago, the CEO of a major domestic oil producer lamented the U.S. oil industry has been “disproportionately” slammed by the oil-market crash.
North America has sustained the bulk of the energy world’s job cuts, investment reductions, bankruptcies and rig closures since late 2014, and the United States is expected to bear most of the oil-production decline needed to correct the oil-market oversupply. In a year and a half, 70,000 U.S. oil and gas jobs have been lost and 1,400 drilling rigs have been sidelined.
“Our activity level is bare minimum,” Hess CEO John Hess had said at the IHS CERAWeek energy industry conference in downtown Houston.
Still, if not for the U.S. shale oil industry’s ability to act quickly, the oil glut might not have been corrected for years, energy research firm Wood Mackenzie says in a new report comparing the ongoing downturn to the mid-1980s oil bust.
Some analysts believe U.S. crude production will drop this year by 600,000 barrels a day or more, which may be enough to realign supply and demand late this year or early next year.
In the 1980s, crude production outpaced supply for four years in a row, and the market was still oversupplied by nearly 3 million barrels a day in 1988, long after crude prices were in free fall in 1986, according to Wood Mackenzie.
“This time, it should be different because by 2017, the projected decline in non-OPEC supplies will occur more quickly than in the 1980s,” Wood Mackenzie said.
That’s because U.S. shale oil production, which didn’t exist in the 1980s, can theoretically respond much more quickly to a lower price signal than conventional oil production.
Wood Mackenzie believes crude prices could begin recovering in 2017 after the market rebalances and starts working through high oil-inventory levels, though it noted China’s oil demand and Iran’s return to the market are “key risks” to that forecast.
The recent oil rally, analysts say, could prevent that U.S. oil-production decline from happening. On Wednesday, U.S. crude edged higher to more than $38 a barrel, creeping closer to levels that could prompt oil drillers to hedge their future production, which could cut into the expected output decline this year.
“There is no hard and fast rule for industry hedging policy,” analysts at Tudor, Pickering, Holt & Co. wrote in a recent client note. “But recent conversations with management teams suggest that operators would consider hedging out part of their production stream in 2017 above $45 a barrel in order to protect downside risk from a cash flow perspective.”
Oil futures contracts for February 2017, for instance, are priced at $44.14 a barrel. Tudor Pickering analysts say oil companies will be more aggressive in locking-in future prices when crude prices reach $50 to $60 a barrel, a level drillers could “actually hold production flat with internally generated cash flow.”
Goldman Sachs says the recent oil-price rally, which pushed Brent crude to $41 a barrel on Wednesday, is premature and not sustainable, as it comes before U.S. crude production can drop enough to actually fix the oil glut.
“The longer (oil prices) run, the more destabilizing they become to the nascent rebalancing they are trying to price,” Goldman analysts said. “Energy needs lower prices to maintain financial stress to finish the rebalancing process; otherwise, an oil price rally will prove self-defeating as it did last spring.”
U.S. crude in early trading on Wednesday rose $1.60 to $38.10 a barrel on the New York Mercantile Exchange. Global benchmark Brent rose $1.38 to $41.03 a barrel on the ICE Futures Europe.