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Oil Price Crash a Disaster for Producers

Oil prices collapsed to the lowest in nearly two decades as Saudi Arabia moved to further increase production amid a crash in global energy demand, raising the specter of bankruptcies and layoffs in the oil industry.

With the spreading coronavirus pandemic bringing economic activity to a crawl, crude plunged 24%, or more than $6.50 a barrel, to settle in New York at $20.37 per barrel. It was the lowest settlement price since February 2002, and far lower than the bottom of the last when it hit $26.21 a barrel in February 2016.

Since the outset of the coronavirus and the global oil price crash, prices for North Dakota’s Bakken Shale crude oil have cratered to below $20/bbl, and state officials said they expect the rig count and completed wells to follow suit.

Lynn Helms, director of the state Department of Mineral Resources, said production is expected to plummet in the months ahead. But he doesn’t expect oil to drop below the 1 million barrels per day (bpd) marker.

Oil producers in the Permian, which have driven U.S. production growth in recent years, need prices of at least $47 per barrel to turn a profit, according to an analysis from BloombergNEF. At $35 per barrel, nearly the entire Permian can’t make a profit, and no one can at $30 a barrel or below, BNEF analysts said.

Frac sand producers are caught in market forces, as well-completion activity has slowed to a crawl.

In 2016, prices fell to $26 per barrel, prompting a similar decline in U.S. production of just more than 1 million bpd. But BNEF cautions the U.S. shale industry is different structurally now than it was in 2016, when it was able to rebound within a few months. In part, producers are a victim of their own success, leaving them with ever-smaller profit margins.

Shale producers could also face some trouble attracting investment, according to BNEF, which notes Wall Street is reluctant “after years of overspending and low returns.”

“Today producers are lean and have little room to improve their operations and significantly reduce costs,” BNEF says.

Saudi Arabia will continue to supply a record 12.3 million bpd to the oil market in the coming months, as per order from the energy ministry, the official Saudi Press Agency reported.

“Ministry of Energy directed Saudi Aramco to continue to supply crude oil at a level of 12.3 mbd over the coming months,” read the brief statement as the Kingdom is intent on unleashing growing crude oil volumes on the market, aiming to significantly boost its crude oil exports to a record-breaking more than 10 million bpd in May.  

The Saudis, who launched an all-out price war for market share with Russia after Moscow refused to back deeper cuts, will not only boost April exports from the current 7 million bpd, but will also grow exports in May by another 250,000 bpd from April.

North American shale producers have cut planned expenditures between 25% and 55% on average, as crude prices have plummeted to two-decade lows.

“We are in an unprecedented and uncertain market driven by fear and panic. In this environment where we do not get paid adequately for the product we produce, we will reduce activity and focus on maintaining our financial strength,” Diamondback Chief Executive Officer Travis Stice said.

Producers are also cutting executive pay and asking suppliers for price discounts on equipment and services. Shale producer Parsley Energy Inc. said it would slash executive pay 50%, the deepest such cut announced so far, and has also asked its suppliers to consider 25% reduction in service pricing.