It seems that, in the oil market, low prices really do cure low prices. A few weeks ago, when the price of benchmark West Texas Intermediate had climbed from $10 to nearly $20 per barrel, I tentatively predicted that “we may have seen the worst for oil.” Flash forward to today, and WTI is trading at about $34, nearly triple its low point earlier this spring (setting aside the bizarre day when one monthly WTI contract actually closed below $0).
The global coronavirus pandemic hasn’t run its course, and the economic damage it has sparked still has further to go. But there are some basic factors lining up in oil’s favor. U.S. consumption, which cratered in March and April when state governments issued unprecedented stay-at-home orders, has staged a partial recovery. Daily demand, which typically comes in around 21 million barrels, fell to less than 15 million barrels, but has since clawed back to about 16.5 million. As more states relax their public health orders and consumers venture out on the roads, we can expect demand to grind higher (unless a new wave of infections forces the economy to shut down again). Meanwhile, production around the world is dropping. In the U.S., daily output has fallen from a record of 13 million barrels before the crisis to about 11.5 million now. The number of rigs drilling new wells is at a record low. OPEC members, Russia and other producers are taking the difficult steps necessary to curb exports while they wait for demand to come back.
There has been plenty of pain for the industry, even as prices have shot higher. Energy stocks have substantially underperformed the broad market this year. Many companies have had to cut or end their dividends, a further blow to shareholders. The shale industry faces a wave of debt repayments in the coming years after borrowing heavily to drill thousands of wells in places like Texas’s Permian Basin. Oil at $34 per barrel isn’t going to solve any of those problems. (Was it really just 2014 when WTI traded for about $100?)
So where do we go from here? I’ll stick my neck out one more time and guess that despite plenty of short-term ups and downs, oil prices will keep climbing this year, again, barring the dreaded “second wave” of coronavirus infections. Much of the industry is unprofitable at today’s prices. The economy won’t be weak forever. Workers will start heading back to their jobs. Travelers will (eventually) get on airplanes again.
So consumers should expect gasoline prices to keep creeping higher. After bottoming out in late April, the nationwide average price is up about 15 cents. Some states are seeing far steeper rises. (In Wisconsin, the state average fell to about $1.20 per gallon in late April. Today, it’s up to $1.86.) Most folks hitting the road for Memorial Day can expect wallet-friendly fill-ups, but later this summer may be a different story.
The longer run is harder to predict. As we bring Kiplinger Alerts to an end this week, I’ll leave you with a few thoughts about the future of the oil industry.
First, how much has the pandemic changed the way people work and live? I doubt we’re on the cusp of a future where everyone works from home; indeed, most jobs can’t be done remotely. But it seems likely that a sizable number of people who were forced to stay home this spring are going to decide they like working from home, at least part-time. Telecommuting was already on the rise, and this societal work-from-home experiment is demonstrating that millions more people can do it. Employers probably won’t object to the potential rent savings that come with a smaller office. So, I expect a lasting hit to demand from folks who end up working remotely a day or two per week.
Second, how quickly does the electric future arrive? Electric vehicles are still a niche segment, but they’re a growing niche. As I wrote recently, we’re about to see a bevy of electric pickup trucks and SUVs hit the market, partly driven by government mandates and partly driven by falling battery prices, which make EVs more cost-competitive. I believe there’s still a lot of life left in the internal combustion engine, but I also believe EVs will be fairly commonplace before long. How many consumers ultimately decide they prefer plugging in their car overnight instead of stopping at a gas station will go a long way to determining whether global oil demand can continue its decades-long rise. This is a question that must keep oil company executives awake at night.
Third, will the oil industry still be able to raise the capital it needs to keep production up? Fracking is an expensive process, and many investors have gotten burned financing it over the past decade. Especially after seeing oil prices plummet to multidecade lows this spring, are Wall Street banks or private equity outfits going to keep lending to oil producers, or buying their shares? Are the small retail investors? For years, they bought shares in big oil companies largely in order to collect the juicy dividends paid out by those firms. But with dividends under pressure, and many companies cutting them to save cash, will oil stocks hold the same appeal? Then again, perhaps the industry can find new ways to slash its production costs and return its balance sheets to good health.
Whatever happens, it’s safe to say that the 2020s will be a pivotal decade for an industry that shaped the 20th Century but is under major pressure in the 21st Century. I’ve certainly enjoyed tackling some of these topics over the past five years, along with the many thought-provoking questions and comments I’ve gotten from readers during that time. Though we’re closing the book on Kiplinger Alerts, I hope you’ll keep in touch and drop me an e-mail about all things energy-related. And we’ll continue to write about these issues in our weekly Kiplinger Letter, which you’ll start receiving by e-mail at no charge in lieu of Alerts, each Friday afternoon. (If you’re already a Letter subscriber, you’ll receive a complimentary extension of your subscription.)
Thanks for reading. It’s been a pleasure.