Crude oil is stored in Cushing, Okla. Even with oil prices’ recent rebound, they are still well below where they started the year.
Photo: johannes eisele/Agence France-Presse/Getty ImagesU.S. crude supply is falling at its quickest pace ever, easing a global oil glut and spurring a swift recovery in fuel prices.
Yet oil’s push back above $40 a barrel as drivers return to roads isn’t enough for beleaguered shale producers, which until recently were the driving force behind a transformation of the global energy industry. For many of them, prices haven’t risen far enough to help ease the strain of debt taken on during boom times. And the need to cut output in the face of pandemic-hit demand means they can’t pump their way out of trouble.
Weekly U.S. output recently fell to 10.5 million barrels a day, down from a near-record of 13 million barrels a day from late March, government data show. With companies from Chevron Corp. to Continental Resources Inc. shutting in productive wells in response to the coronavirus, the slide marks the biggest 11-week drop on record in figures going back to 1983. In percentage terms, the decline is the biggest since the 2008 financial crisis, when U.S. oil output was less than half of what it is now.
The tumble in domestic supply and record output cuts from the Organization of the Petroleum Exporting Countries and partners including Russia are supporting oil prices after they collapsed earlier in the year.
Even with the recent rebound, oil prices are still well below where they started 2020, and many investors still expect a wave of bankruptcies and industry deals that overhauls the U.S. energy sector.
“I don’t think that $40 oil is enough to turn around the shale industry,” said Andy Lipow, president of Houston-based consulting firm Lipow Oil Associates. “This price is still not enough to cover all the debt and costs that have been incurred during the boom.”
Domestic crude output has since risen back to 11 million barrels a day, but some analysts expect supply declines to persist moving forward.
As a result, U.S. crude on Friday closed at $40.65 a barrel—its highest level since early March. Prices inched down to $40.63 Monday but in recent weeks have pared some of their 2020 decline after starting the year above $60. Prices briefly turned negative in late April due to a global glut.
The rebound remains tenuous because coronavirus cases continue to climb in many large fuel-consuming states including Texas, California and Florida. Adding to the energy industry’s woes: Prices for natural gas recently hit a roughly 25-year low, with the pandemic sapping demand for the power-generation fuel.
The turmoil is rippling through the sector. A recent Deloitte LLP analysis found that shale companies, such as Occidental Petroleum Corp. and Concho Resources Inc., could have to impair or write down the value of their assets by as much as $300 billion. The industry burned through tens of billions of dollars annually in recent years to increase production, and many companies took on hefty amounts of debt.
Analysts are now debating which companies with lower costs will make it through the crisis. Many expect a bifurcation between that group and firms with too much debt to survive.
“I would call it a transformation,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “You will continue to see bankruptcy and continue to see consolidation.”
North American oil-and-gas producers, pipeline operators and oil-field-service companies have more than $240 billion in debt maturing over the next five years, according to Moody’s Investors Service.
Denver-based Whiting Petroleum Corp. became the first major shale bankruptcy of the pandemic earlier this year. Industry pioneer Chesapeake Energy Corp. filed for bankruptcy protection on June 28, and analysts say more producers likely will follow.
The oil-price rebound “has maybe given a little bit of timing breathing room but ultimately hasn’t really changed the economics of some of these assets,” said Scott Sanderson, a principal in Deloitte’s oil-and-gas strategy and operations practice.
U.S. oil has pushed back above $40 a barrel as drivers return to roads.
Photo: David Paul Morris/Bloomberg NewsShares of S&P 500 energy producers have fallen 38% this year, though they remain up solidly from a low hit in March. Some companies including ConocoPhillips, Parsley Energy Inc. and EOG Resources Inc. already have laid out plans to begin increasing supply in response to higher oil prices and traders say it is inevitable that producers would respond if the rally continues.
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But even with those increases from existing wells, many investors expect a plunge in new drilling activity to damp U.S. crude output moving forward. The number of wells drilling for oil in the U.S. has tumbled to 185, its lowest level in more than a decade and a fraction of the total from the start of the year, figures from Baker Hughes show.
“We expect [exploration-and-production companies] in general to remain capital disciplined and focused on the balance sheet,” Continental Resources Chief Executive William Berry said at a recent JPMorgan Chase virtual industry conference. Continental has been substantially curtailing its oil production lately.
In addition to U.S. output, traders are closely monitoring supply from OPEC and its partners to see if global producers also are responding to the price rebound.
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Many OPEC members such as Saudi Arabia need much higher oil prices to balance their budgets, according to International Monetary Fund data, and the cartel recently has indicated a willingness to continue curbing output given the continuing uncertainty caused by the pandemic.
“The shale industry knows that OPEC+ still has shut in a significant amount of oil production that could easily return to the market,” Mr. Lipow said. “That’s one of the reasons for them remaining cautious.”
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com
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