Dec. 17–Crude oil prices on Monday settled below $50 a barrel for the first time in more than a year, threatening the health of the Houston energy sector again after a slow two-year recovery from the worst oil bust in a generation.
The dip below the $50 threshold places prices just below what’s considered necessary for most energy firms to make money. It adds to recent pessimism among investors and executives as oil companies set their spending budgets for 2019, potentially considering cutbacks and modest layoffs, energy analysts said.
Oil prices have plunged by about one-third since early October from a high of $76 a barrel to a new 2018 low of just below $50 a barrel as markets have grown fearful of an oil glut as production increases and demand growth weakens amid a a global economic slowdown. A recent deal this month by OPEC and Russia to scale back production for the first six months of 2019 may have prevented another widespread industry collapse, analysts said, but the accord has failed so far to brighten outlooks.
“We’re finding a floor and the oil price could go a bit lower in the short term,” said James West, an energy analyst with Evercore ISI in New York. “But we shouldn’t be in any kind of a bust scenario.”
Cutbacks may come
Staying at or below $50 a barrel likely will mean spending cuts by oil companies, a decline in drilling activity and the loss of some jobs in Texas, West said. Already, Houston-based ConocoPhillips, the nation’s largest independent oil and gas producer, said it is keeping its spending flat next year.
If oil prices don’t rise in the weeks ahead, more companies will follow ConocoPhillips, analysts said. Oil prices are considered healthy at about $60 a barrel.
U.S. oil prices settled Monday at $49.88 a barrel, down $1.32 on the day to its lowest level since September 2017. Oil futures were pushed further down by a weak overall day on Wall Street.
On the flip side, lower oil prices are good for consumers. The Houston-area average for a gallon of regular unleaded gasoline on Monday slipped to $2 per gallon, the cheapest since December 2016, according to GasBuddy, which tracks prices across the country. Plenty of stations in the region are selling gasoline below $1.90 a gallon.
Across the country, drivers can find gasoline for less than $2 a gallon in at least 31 states. The plunge in gasoline prices has put hundreds of millions of dollars into the pockets of American consumers.
The economic and political benefits of lower gasoline prices are among the reasons President Donald Trump has urged Saudi Arabia and the Organization of the Petroleum Exporting Countries to keep churning out oil, analysts said, even thought falling prices could undermine the growth of the U.S. oil and gas industry.
Despite the president’s push, the so-called OPEC+ group led by the Saudi Arabia and Russia agreed less than two weeks ago to cut oil production by 1.2 million barrels a day to help stabilize collapsing oil prices. The deal, however, hasn’t stopped oil from falling below the $50 barrier, in large part because the Saudis, Russians and the world’s largest producer, the United States, have been pumping oil at or near record highs, each churning out more than 11 million barrels a day.
Pumping in the Permian
Just about a year ago, U.S. production — driven by the booming Permian Basin in West Texas — surpassed the 10 million barrel a day level for the first time since 1970. U.S. output recently reached an estimated 11.7 million barrels a day, according to the Energy Department.
Even with the Saudis and Russians scaling back, investors and analysts worry that production from U.S. shale oil fields will offset much of the oil that OPEC+ is taking off the market. Pipeline shortages in West Texas are slowing production somewhat, but new pipelines will start coming online next year to move the crude from the Permian to refining and export hubs along the Gulf Coast, adding to global supplies, analysts said.
“The OPEC supply (deal) is helpful, but it may not be enough given continued shale growth and the pipes that are coming to undo the bottleneck,” said Jamie Webster, senior director at Boston Consulting Group’s Center for Energy Impact in Washington.
The surge in production comes as worries about a global economic slowdown mount. The trade war between China and the United States is adding to those worries. Stocks fell again Monday, with the Dow Jones Industrial Average losing more the 500 points.
Happy New Year?
The question for oil markets is whether OPEC+ nations will stick to the agreed-upon production cuts. Analysts said it will take until at least late January to see how much oil the agreement is taking off the market. If OPEC+ comes through, prices could resume their rise.
“Things are bearish now, but they could turn around after the beginning of the year,” said Brian Youngberg, a senior energy analyst at Edward Jones in St. Louis.
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