With West Texas Intermediate below $30 a barrel and Saudi Arabia’s plans to keep pumping as much as it can for as long as it can, the U.S. oil industry is bracing for job losses that could end up in five-figure territory. “A sustained drop in oil prices would cost the sector 50,000-75,000 jobs if employment returned to its low from a few years ago,” the chief economist of PGIM Fixed Income, Nathan Sheets, told CNBC this week.
The last industry downturn caused by low prices cost the U.S. oil industry—including oilfield services—as many as 200,000 jobs. That was about a third of the total workforce employed in the sector. Now, the US oil industry could be headed for a rerun.
Companies, notably shale oil companies, are already beginning to trim costs in response to the oil price shock. Several companies have already announced spending cuts of between 25 and 50 percent for the year, and Halliburton has said it would furlough as many as 3,500 employees for two months. These are the first signs of an industry entrenching itself to survive the latest crisis.
According to Rystad Energy, only five companies can drill new oil wells in the U.S. shale patch at a profit with WTI at $31 per barrel. With WTI now trading at below $24 a barrel, the number of unprofitable wells has increased substantially. One company has already asked oilfield service providers to slash the prices of their products and services by as much as a quarter and with oil in free fall, more are likely to follow.
In Texas, people are bracing for major job losses in the Eagle Ford play, the San Antonio Express reported this week. The daily cited energy analyst Paige Meyer from CFRA Research, who noted the situation was unprecedented.
“We have never seen this before — to have a demand shock and a supply shock at the same time,” Meyer told San Antonio Express.
Indeed, this time the odds are stacked high against the oil industry. The coronavirus outbreak that was declared a pandemic by the World Health Organization and that is prompting border closures, states of emergency, and travel bans has combined with the oil price war that broke out earlier this month between Saudi Arabia and Russia.
The combination has added enormous pressure to an industry that has already been having problems with investors looking for higher and more sustainable returns and a rising and increasingly hostile opposition against the core business of that industry from governments and activist groups demanding that oil companies stop doing what they were set up to do, which is to produce oil.
According to Meyer, as many as 21 U.S. oil companies had announced spending cuts of an average of 40 percent for the year. The spending cuts mean idling drilling rigs and with them, the crews that service them. The more the industry is squeezed by the unprofitable wells and the lack of cash—many companies are generating negative cash flows and have been doing so even before the oil price slumped this month—the more jobs will go.
One silver lining is that some companies at least might limit the job losses thanks to cash from oil hedging. Rystad Energy reported recently that 30 companies accounting for 38 percent of total U.S. production this year had hedged their output at an average price floor of $56 a barrel. This, according to the Norwegian consultancy, would make for hedging gains of some $10.5 billion if WTI stays below $40 for the rest of the year and even $17 billion if the U.S. benchmark trades at an average of $25 a barrel this year.
By Irina Slav for Oilprice.com
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