The energy industry is bracing for a potential second drop in oil prices as the number of coronavirus cases skyrockets, again threatening demand for crude and hopes for a steady recovery.
Several states, including Texas, are reporting sharp spikes in COVID-19 infections and hospitalizations, raising the specter of another round of lockdowns that could slow or halt the industry’s fragile resurgence. A “double dip” in oil prices, analysts say, could lead to prolonged pain in the industry — and in Houston, where tens of thousands of energy workers support the region’s economy.
“A resurgence of COVID-19 is a major risk factor for demand,” IEA, a Paris energy agency, said last month.
Oil prices have made a surprisingly steady return from the collapse ignited by lockdowns as the virus pandemic grew earlier this year. Crude settled above $40 a barrel Monday for the first time since plunging to negative-$37 on April 20, when the world was awash in unwanted oil. West Texas Intermediate, the U.S. benchmark, settled at $38.49 Friday, down slightly from Thursday.
The recovery, however, now looks tenuous, as no one is certain whether the current surge in COVID-19 cases could lead to business shutdowns and depressed consumer activity. Harris County on Friday issued a new “stay home, work safe” advisory, asking residents to stay home except for essential trips, to work from home if possible and to avoid unnecessary travel.
Other countries that had been recovering from the effects of the coronavirus pandemic also are now dealing with renewed outbreaks. Beijing last week shut down schools because of fears of a resurgence in China, which reported the first known cases of the novel coronavirus.
A second wave of coronavirus cases isn’t the only concern looming over the energy industry. U.S. oil and gas companies also are concerned about how OPEC and Russia will respond to U.S. drillers ramping up production as crude prices rise. If the Organization of the Petroleum Exporting Countries and its allies decide to flood the market with cheap crude, oil prices could fall again, regardless of how many coronavirus cases there are.
“We do have to be worried about a double bump in this process, depending on what the OPEC+ countries do,” Chevron CEO Ryan Lance said in an interview published this month by industry research firm IHS Markit.
Historically, so-called “double dips” or declines in oil prices are rare. Once oil prices start to recover, they generally continue, analysts and economists said.
This current oil bust is different, however, because there are so many unknowns with the pandemic, said Jennifer Rowland, a senior energy analyst at Raymond James.
“If this was a normal economic cycle and we were looking at lower prices because we had just been in a recession, we wouldn’t expect a double dip,” she said. “But we’re in completely uncharted territory because this is virus-driven. We don’t know its trajectory, and it’s hard to have any confidence in past parallels.”
A double dip in oil demand and prices will depend on whether state and local governments impose widespread lockdowns or allow businesses to remain open with requirements for face masks and social distancing. If businesses are allowed to remain open and if consumers aren’t scared off, oil demand will likely show little change.
Karr Ingham, a petroleum economist with the Texas Alliance of Energy Producers, said he can’t imagine that state and local governments would impose the type of widespread and strict lockdowns seen in March and April because of the dire economic consequences that such a move would have. It’s unclear how much political willpower there is to mandate a second lockdown, which would undoubtedly prompt public outrage, he said.
“I’m not sure we can tolerate another round of shut-ins,” Ingham said. “I think early on, people can extend a little grace, but I’m not sure the population would stand for it now. You simply cannot prevent people from earning an income.”
The rising number of cases and hospitalization rates in the U.S. have yet to affect oil prices, but they could depress them again, said Rystad Energy, a Norwegian research company.
“Overall, it seems that today the market is overly enthusiastic and ignores the risk that is attached to new record COVID-19 cases,” Rystad said. “But on a trading floor, a concern does not always translate into a problem, until it becomes one.”
paul.takahashi@chron.com
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