Rumors of Oil's Death Have Been Greatly Exaggerated | The Perryman Group

Rumors of Oil's Death Have Been Greatly Exaggerated

By: Dr. M. Ray Perryman
Published in syndication December 09, 2020

Among the myriad industries affected by the COVID-19 pandemic is one particularly critical to Texas: oil! As much of the global economy shut down to slow the spread of the virus this spring, fuel demand plummeted. Prices plunged, with futures contracts even briefly going negative. The industry initiated a rapid shutdown of drilling activity, which rippled through an enormous supply chain and supporting retail and service enterprises in the affected communities and the entire state. Many service firms and large swaths of production and reserves changed hands, as capital resources for small and mid-sized firms became virtually nonexistent.

Energy is the state's largest export sector, supporting a substantial segment of economic activity across Texas. When exploration, drilling, production, oilfield services, pipelines, storage, refining, shipping, and other aspects of the sector are considered, our analysis indicates that oil from the Permian Basin alone supports about 10% of the Texas economy, with the industry statewide comprising about 13-14%.

As the pandemic caused chaos, comparisons to the devastation in the 1980s were inevitable. However, the issues this time were caused solely by a health crisis, and it remains merely a matter of time before recovery ensues. The pandemic has lingered beyond expectations, but some balance has already been restored.

Rig counts in Texas have recently edged upward. Early this year, over 400 rigs were running in the Permian Basin. In mid-August, the number was 116. In late October the count went back over 130 and was 163 at last count. Prices have generally been above $40 per barrel for a while, which is sufficient to support the increase. We expect them to rise modestly next year.

Obviously, there is still significant near-term uncertainty. COVID-19 cases are rising, and further restrictions may be needed, which could negatively affect demand and prices. This, too, shall pass.

The pandemic has disrupted many aspects of life and the economy, and oil is certainly no exception. What has not been materially altered, however, are the long-term global demographic patterns, manufacturing and trade flows, and pace of technological innovation that drive the ultimate patterns in petroleum demand and production. Earlier this year, the demand for oil in the world fell from about 101 million barrels per day (bpd) to just 72 million bpd in April, the lowest level since 1995. Many pundits were writing oil's obituary. However, almost 70% of the loss has already been recouped, and we and other analysts expect the 2021 level to be only 2-3% below prior peaks. Assuming vaccinations and therapeutics bring the virus under control, the market should return to previous peaks in 2022.

The oil environment over this past year has not been fun, but it is also not permanent. Stay safe!