No energy sector recovery before 2022…or ’23?

“Without a doubt this is the most difficult cycle I’ve experienced in my 30-year career,” one survey respondent told KC Fed analysts.

The energy sector may not recover from pandemic-caused disruptions until 2022, according to new analysis from the Dallas branch of the Federal Reserve Bank. The bank said that an upswing in petroleum consumption may signal that the worst has passed.

At the same time, a quarterly survey by the Kansas City Fed branch found that a majority of respondents didn’t expect the sector to recover until 2022 or even 2023.

“Without a doubt this is the most difficult cycle I’ve experienced in my 30-year career,” one survey respondent told KC analysts.

Before the pandemic, the U.S. energy sector had been expected to produce more than 13 million barrels per day. It may not reach 11 million barrels per day by year-end 2021. However, the Dallas Fed said that with supply curtailed, a return to more normal demand levels could aid a price recovery in 2022.

In its report, the Dallas Fed said the price of benchmark West Texas Intermediate crude oil has stabilized at near $40 per barrel. It averaged $38 in June and $17 in April. At one point in April, producers found themselves forced to pay buyers $38 per barrel as near-term oil contract prices collapsed on fears that there was no place to store deliveries.

WTI prices are recovering, but remain lower than what operators need to be profitable. Full recovery may still be months away.

Even at current levels, prices barely cover operating expenses, the Dallas Fed said. And the price is also too low to support new drilling. The average price per barrel needed to cover operating costs is $23–$36. Meanwhile, profitably drilling a well requires prices of $46–$52.

The Kansas City survey pegged the average oil price needed for profitable operations at $49 a barrel, with a range of $35 to $65. That average price level isn’t expected to be reached for at least a couple of years.

Lest we forget, in a one-month period from mid-March to mid-April, diesel fuel consumption declined 37%, gasoline fell 48% and jet fuel was down 80%, all due to Covid-19-related economic shutdowns and stay-at-home orders.

In April, Americans used 14.7 million barrels of oil per day, 73% of what was forecasted. Consumption rebounded from that low, the Dallas Fed said, and reached 85% of forecasted levels in June.

The U.S. energy sector is still coping with market uncertainty, the Dallas Fed said. Sixty energy companies sought bankruptcy protection from January through June. Relief is difficult given the industry’s limited access to new capital.

“Bankrupt companies are just restructuring and there is very little new capital available,” the KC Fed quoted one respondent to its survey as saying.

Energy companies are cutting workers, even as some other sectors of the economy are showing signs of recovery. Texas oil and gas companies laid off 61,000 employees through June, roughly 26% of the workforce they employed before the pandemic. Further cuts are likely, the Dallas Fed said.

As one energy sector respondent to the KC Fed’s quarterly survey put it, “The longer it takes for economy to recover, people to get out and start spending, the more difficult it will be for companies to survive.”

I took this photo of a plane headed west out of Denver from my front porch a couple of years ago. Those are storm clouds, not smoke!

Author: David Wagman

I live in Colorado where I write about a wide range of topics, and get outside regularly to hike, bike, garden and walk the dog!