The price of oil rose today, with Brent crude hovering around $30 per barrel, after markets hit record lows last week. State economists are hopeful the week will end on a high note, signaling a tidal change over the summer.
“The market is trying to find the bottom and stabilize,” said David Dismukes, executive director of the Center for Energy Studies at LSU, as news hit of Capital Region petrochemical plants cutting back production and staff. “They’re trying to find the bottom, and trying to get there without cutting their arm off.”
The Fed’s move to get liquidity into the market this week paired with the pending financial stimulus package in Congress are “twin life preservers” for the economy, Dismukes says, but not a rescue boat.
“When we can get through this thing, they’ll help facilitate a rapid recovery,” he says.
But if prices start to stabilize above the $30 range, only half of the problem is solved.
The dispute between Saudia Arabia and Russia isn’t expected to correct itself anytime soon, he says. The two parties aren’t scheduled to meet again until June, but getting them talking in the same room, even then, will be a big event.
If and when that does happen—and if the two agree to go back to the previous production levels—Dismukes predicts prices will stretch only into the $40-$49 range.
These low prices have “to be hammering the treasuries of the Saudis and Russians,” economist Loren Scott says. “I don’t think the Russian economy or the Saudi economy can handle this for a very long time.”
He’s more optimistic, thinking that if negotiations do go though, prices will stretch past $50.
“It went down hard, maybe it’ll come back hard, too. If we’re very lucky,” Scott says.
That hit should drive them back to the bargaining table “sooner rather than later,” he says. In the meantime, there’s been so much oil put on the market that storage is becoming a serious issue.
Scott is predicting that just like in 2014, major oil and gas companies will attempt to be more efficient and renegotiate service contracts. But is there much room for negotiations? Probably not, he says, predicting independent companies without “deep pockets” will likely have to exit shale extraction.
With prices so low, it has also caused problems for U.S. shale, he says, especially for the independent companies who are already facing “extremely unhappy” investors.
“To some extent, the Russians are getting what they wanted: more pressure on the shale play,” Scott says.
The world will be looking to China as a major trading partner to see how well it is able to pick up the pieces, Dismukes says.
Yet, “there’s an expectation problem out there,” he says, adding there’s already been enough economic damage to linger the rest of the year.
If the market does rebound this year, he doesn’t expect any plants to change course.
While many people may be eager to go out and spend, reschedule vacations and get back to normal after COVID-19 has passed, Dismukes says there could be lingering behavior changes; people could be less likely to take cruises and get on airplanes.
“I hope and I think we’re at the bottom and today represents the beginning of an upturn,” Dismuke says. If the week ends with prices up, that will send a lot of good signals to investors.
Scott says his “wildest hope” is that the coronavirus will be under control by June.