LONDON (AA): The novel coronavirus (COVID-19) has hit the US’ energy industry hard as US crude oil production is in steep decline and many major oil companies have already announced losses for the first quarter of the year.
As motor vehicle and airline travel came to a halt, the demand for gasoline, diesel and jet fuel has been very weak in the world’s largest oil-consuming country.
On the demand side, US oil producers were unable to rapidly adapt to plummeting crude prices and failed to introduce production cuts in time. As a result, they are left with excess oil supply, which needs to be promptly stored in a market where storage capacity is almost full.
The failure to physically move the oversupply resulted in US producers offering money to buyers to eliminate their excessive inventories. This plummeted American benchmark West Texas Intermediate (WTI) crude oil futures on April 20 to negative territory of minus $37 per barrel for the first time since 1983.
In Cushing, Oklahoma, the US pipeline hub where the price of WTI is determined, storage capacity totaled 76 million barrels. According to the EIA, the week ending April 24 saw storage of 63.4 million barrels, meaning that over 83% of capacity was full.
US output already down by 1,2 million bpd
After surpassing Saudi Arabia and Russia, the US has become the world’s largest crude producer in November 2018. Its crude output hit an all-time high of 13.1 million barrels per day (bpd) for the week ending Feb. 28 this year, according to the Energy Information Administration’s (EIA) data.
With oil prices plunging last month to the lowest levels since 1999, the US’ crude production fell to 11.9 million bpd for the week ending May 1, the EIA data showed, marking a 1.2 million bpd loss in just two months.
The number of oil rigs, an indicator of short-term production in the country, decreased for seven consecutive weeks to reach the lowest level since June 2016 for the week ending May 1, according to oilfield services company Baker Hughes data.
The decline in the number of oil rigs is indicative of the likely enduring fall of US crude oil production over the coming months.
Billions of dollars in net loss
In the last great price downturn, the international benchmark Brent crude price fell from $115 per barrel in June 2014 to below $30 per barrel in January 2016, recording more than a 74% decline over 19 months.
During that period, investments of around $250 billion evaporated in the US oil industry, approximately 300,000 jobs were lost and more than 250 small- and medium-scale oil companies went bankrupt.
This time, the price of Brent fell from $45 per barrel at the beginning of March to below $16 per barrel at the end of April, marking more than a 64% decline in less than two months.
This implies the US oil industry will be hit harder in the current low price environment, compared to the last price plummet a few years ago. And, some oil companies have already started to show losses.
In the first quarter of 2020, the US’ largest oil producer ExxonMobil announced a net loss of $610 million, while another oil major ConocoPhillips posted a net loss of $1.7 billion, according to their financial results statements.
While ExxonMobil and Chevron are planning to lower their capital expenditures by $10 billion and $3.3 billion, respectively, ConocoPhillips said it would cut theirs by more than $5 billion, compared to last year.
The world’s largest oilfield services firms US-based Schlumberger and Halliburton posted a net loss of $7.3 billion and $1 billion for the first three months of 2020, respectively, according to their financial results. For Baker Hughes, its net loss was a whopping $10.2 billion for the January-March period of this year.
30,000 oil jobs at risk in Houston
In Houston, Texas, the heart of the US oil industry, an estimated 30,000 oil sector jobs are at risk, according to some market estimates. This equates to around 12% of the US’ total oil industry workforce.
In the US overall, a total of 33.48 million people filed for unemployment claims for the seven weeks up to May 1, the US Department of Labor figures showed.
While the unemployment rate in the country stood at 4.4% in March, the US Federal Reserve warned that this level could climb to around 20% in the following months.
Due to COVID-19, the US economy contracted by 4.8% in the first quarter of 2020, which was recorded as the steepest GDP growth decline since the global financial crisis of 2008.
With the price of Brent crude hovering around $30 per barrel as of Wednesday, US shale oil producers need prices to be at least $45 per barrel on average to recover their costs.
They can head offshore for more production, where the breakeven price is lower at around $25 a barrel as there are more abundant reserves. However, the development of such projects are costlier and takes longer for meaningful gains.