Pandemic, price war hit oil producers

The price of oil continues to plunge because of a coronavirus-fed drop-off in demand and an ongoing price war between Russia and Saudi Arabia. Producers in the United States are among those being hardest hit.

By

Local News

March 27, 2020 - 3:41 PM

Photo by Richard Luken / Iola Register

An unprecedented set of events — a global coronavirus pandemic declaration, which precipitated a price war between Saudi Arabia and Russia — has the world’s oil industry teetering toward collapse.

And while local merchants, businesses and manufacturers already have felt the effects of the COVID-19 health crisis, perhaps none has a future as tenuous as David Wrestler.

Wrestler owns DMJ Oil in Humboldt, and has put down more than 200 oil wells across the area.

“I understand things are at a standstill, but hopefully it turns around,” Wrestler said. “What has to happen is the economy has to pick up again. The longer it stays down, the harder it will be to get back going again.”

That notion holds true for both the global economy and for the subsequent demand for oil, Wrestler explained.

Oil prices plummeted from about $60 a barrel in mid-February to between $20 and $30 this week. (As of Wednesday morning, the price was $23.89 for WTI crude.)

The problems stemmed from the world coming to grips with the spreading COVID-19 pandemic. With a slower economy, and thus less demand for oil, Russia joined Saudi Arabia  and other big OPEC countries to discuss production cuts.

However, while Saudi Arabia went through with its production cuts, Russia took the opposite tack, essentially flooding the market with extra crude, in an apparent effort to gain market share.

In response, Saudi Arabia followed suit, ramping up its production, and slashing prices even further.

“And then demand fell off a cliff,” Wrestler noted.

If forecasts hold true that the world’s oil demand will fall as much as 20 percent in the coming weeks — in some places that’s already come to fruition, Wrestler said — and on average, the world produces 100 million barrels of oil daily, that means as much as 20 million barrels of oil will simply go into storage.

Therein lies problem number two, Wrestler said. There are only so many storage tanks around the world, which he estimates will fill up in a matter of weeks.

From there, storage will move offshore to tankers, which could be filled to capacity within a few months.

“That glut hasn’t even happened yet,” he said, which would push prices down even more. Wrestler said he would not be surprised to see $10 oil at some point.

And with more oil going into storage, it will take longer for prices to rebound.

The ultimate consequence is oil companies will be forced to slash production, which means less work for its employees. Some workers will be furloughed, or their jobs eliminated altogether. Some companies likely will file for bankruptcy.

David WrestlerRegister file photo

If the downturn extends too far into the future, some oil will eventually become abandoned, or plugged altogether. Eventually, the infrastructure begins to suffer.

By then, Wrestler fears any rebound in oil prices will become exaggerated. “It’ll get too high,” he said. “It always does.

“Twenty-dollar to $30 oil is too low,” Wrestler concluded, “and $100 oil is too much.”

Within the last month, Wrestler pointed to companies in Texas shutting down more than 20 oil rigs, with each employing between 60 and 80 workers.

“That’s a lot of jobs destroyed,” he said.

WRESTLER also farms and raises cattle.

“The farming and cattle help, but the oil is where we make our living,” he said of the family business.

And while health experts are rightly focusing on curbing the pandemic, Wrestler is anxious to see a sense of normalcy return, and soon.

“We need to get the airplanes back in the air, the cruise ships going,” he said. “We’ve got to get everyone’s minds right again.”

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