Oh what a difference a few months can make. In April 2020, West Texas Intermediate oil fell to an unheard of price of -$37.63.
On Tuesday and Wednesday, WTI reached $50 per barrel. As of close on Wednesday, WTI crude onwas $50.46.
Buoyed by the announcement by Saudi Arabia it was cutting production by 1 million barrels per month and the OPEC member countries maintaining their production numbers, the market price responded this week after several months of oil prices hovering between $30-$45 per barrel. “The Saudi’s 1 million barrel cut will certainly help on the supply side of the petroleum industry,” Rep. Larry Scott, R-Hobbs, said. “Frankly, that is the issue right now along with COVID demand.”
Scott serves in the N.M. House of Representatives and is a partner in Lynx Petroleum in Hobbs.
In the supply and demand issue that drive oil prices, Scott said prices this past year have been hurt by overproduction early in 2020 and a drop in demand largely due to COVID-19 shutting down economies. If economies recover from COVID-19 shutdowns, that will increase demand even further, he said.
While the $50 price is helpful, Scott cautioned don’t expect activity or the industry to ramp up to 2019 levels. It means the industry can stay stable for now.
“I’m not optimistic we will be able to do much more than hold our course,” Scott said, explaining the price will allow for some drilling activity. Hobbs Mayor Sam Cobb agreed with Scott the oil price is a move in the right direction for the local economy.
“Any time we see the price of oil increase, it bodes well for our economy,” Cobb said.
But like Scott, he cautioned it likely won’t mean a lot of new activity in the area.
From my reading, it sounds like operators will buy down some debt,” Cobb said. “It does not sound like it will create a substantal increase in activity.”
Even with $50 a barrel oil, Scott also is worried about the months to come. New administrations and elected officials can impact policy and regulations that can stifle the industry and jobs.
“I do see headwinds for the industry in New Mexico both at the state level and what’s coming at the federal level,” Scott said.
But for now, Scott called the price rebound a blessing, especially in light of the year 2020.
“We can live with $50,” Scott said. “We can get by with $50.”
“Its always better to go to $50 than to $30,” Cobb said.
The Saudi’s decision came after a meeting between countries that are part of the OPEC oil cartel and allies like Russia on Monday and Tuesday that have coordinated their production levels in recent years in an effort to sway the market. The pandemic has sowed uncertainty about when an economic recovery might arrive and boost sagging demand for energy.
Leading OPEC member Saudi Arabia urged caution, saying demand for oil remains fragile even as the vaccination roll-out raises hopes for an eventual return to more normal behavior. Its energy minister Abdulaziz bin Salman, told a news conference on Tuesday his country would unilaterally cut its output to help support prices.
“We hope this gesture of good will not be in vain,” he said.
OPEC countries and allies like Russia had decided in December to gingerly increase daily production by 500,000 barrels at the start of the new year and then to reassess the oil market every month. Their goal is to eventually increase production by 2 million barrels a day. That would partially withdraw the 7.7 million barrels a day in production cuts agreed last year.
OPEC faces conflicting pressures after last year’s plunge in oil prices as the pandemic held back energy use and travel. Last year’s output cuts kept prices from collapsing even more than they would have. Raising production now as recovery beckons in the distance would increase revenues for producing countries that have seen their budgets hard hit by lower prices. But pumping too much too soon could undermine the modest rebound in energy prices.