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Huge drop in crude oil prices likely short-lived
Oil industry experts believe the negative crude oil prices are likely short-lived and not a cause for great concern yet.
HOUSTON - The price of crude oil made an unprecedented historic plunge on Monday, dropping below $0 a barrel into the negatives.
West Texas Intermediate oil prices dropped more than 300% Monday and closed at negative $37 a barrel.
MORE: Oil prices crash 305% to -$36.73 a barrel
The news created panic and left many wondering what’s in store for the energy industry beyond the COVID-19 pandemic. However, experts advise investors and industry workers to hang tight and not to panic.
“If you read the headline, you really think it’s the end of the world. Today is what we could call a trading phenomenon,” said John Hofmeister, former Shell Oil President.
Hofmeister said although the steep drop is shocking, the price drop does not mean an end of an era for the oil industry. Instead, he said the news is because the deadline for monthly oil contracts ends Tuesday.
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Those most impacted are not necessarily the oil and gas companies, but rather, the industry traders, who tanked the prices desperate to get rid of the currently, oversupplied commodity before deadline.
“What made today so unique is the calendar had an expiration for what’s called the May contract and too many traders were holding too many barrels and they all just dumped them and were willing to take a loss to get them off their books,” Hofmeister said.
The crude oil prices are likely short-lived according to Hofmeister.
“As a trading phenomenon, you put it in a box and the people that are really impacted by it are the traders. They either won or loss big time today. But it doesn’t really affect the day to day running of an oil and gas company because the oil and gas companies are looking over a much longer horizon time instead of day to day basis. They look ahead and there are already contracts for oil to be sold in June or July and they’re all above $20 a barrel,” Hofmeister said.
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Oil prices plunge by more than 300%
Oil prices are now at -$36.73 per barrel, impacting many people in the greater Houston area. But how and why did numbers plunge?
With a lot of oil supply and nowhere to store it, the bigger concern becomes the dying demand for oil with not enough people traveling, commuting or shopping during the global pandemic.
For Houston, the energy capital of the world, huge losses in revenue translates to cuts across the board in all sectors -- from jobs to production and cutbacks to refineries that could lead to closures down the road.
“Already, the refineries have cut back on their production and are running on only about a 69% utilization rate of their refinery, so they’ve cut a third basically of their production,” Hofmeister said.
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Hofmeister says more companies could begin restructuring, which could lead to more mergers and acquisitions of larger and smaller oil companies. He says some may even have to file for bankruptcy in order to survive.
Additionally, Hofmeister said with declining revenues, drillers and service companies could see potential production cuts of 30% to 50%; support jobs including bankers, lawyers, advisors and other contractors may be laid off or furloughed, and manufacturers such as those that produce mechanical equipment for off-shore and on-shore operations could see their volumes dry up.
The Texas Railroad Commission, the state agency that regulates the oil and gas industry, is expected to vote on potentially limiting production Tuesday.
Hofmeister is confident that Monday’s crude oil plunge does not mean the end of the oil and gas industry but rather, just an extremely painful period.
The upside is consumers could see lower gas prices at the pump for a while until things get back to normal – ie., economies start to reopen and stay-at-home orders and travels are lifted.