Green Shoots for the Oil Market

Energy companies are reeling from the historic oil price rout. The Wall Street Journal reports that Exxon Mobil just notched its first quarterly loss in three decades. Venerable Anglo-Dutch producer Royal Dutch Shell just cut its dividend for the first time since 1945. Other dividends paid by the industry are being slashed or frozen, too.

The financial pain isn’t surprising, given that benchmark U.S. crude oil fell from more than $60 per barrel in January to $10 recently (and, very briefly, in a strange quirk of futures markets, below $0). Worldwide energy demand is way down as the coronavirus pandemic curtails travel and trade. Consumers sheltering at home aren’t buying much gas for their cars, and shipping companies don’t need much diesel when there’s scant demand for most of the products they normally transport.

Barring a miracle cure, the economic damage is likely to continue. But if you look closely, you can see signs that the worst of the hit to the oil market may be over.

Gasoline consumption in the U.S., the world’s largest oil market, remains anemic. But data from the Department of Energy show that gas sales have ticked slightly higher for two consecutive weeks now after bottoming out in mid-April. Retail gas prices, which had been dropping steadily every day for weeks on end, actually rose by a penny from yesterday to today, according to AAA. At $1.78 per gallon for regular unleaded, the national average price is still quite cheap. But we may be near the bottom for both fuel demand and prices.

Crude oil prices have responded accordingly. After trading at $10 last week, West Texas Intermediate has rallied to nearly $20. There’s no guarantee prices won’t sink yet again, especially if energy producers run out of storage for their surplus production while demand is so weak. But here, too, there are glimmers of hope for the industry. OPEC’s production cuts are scheduled to take effect starting today. Energy firms in the U.S. continue to shut down drilling rigs, which means there will be fewer new wells coming online in the next several weeks. Other companies are capping existing wells, figuring it’s better to keep the oil in the ground than to sell it at a loss.

Expect extreme volatility in oil prices to continue, given the unprecedented damage to the global economy that the coronavirus is causing. But if commerce and travel can slowly start to emerge from spring hibernation, and if producers keep closing the oil taps, we may have seen the worst for oil.