Brent crude has slipped below $65 per barrel. WTI is trading barely above $60. Neither Trump nor China are backing down from the trade war that started the rout. OPEC+ has not yet updated its production plans, which contributed to the rout. Yet it is pretty much business as usual in the U.S. oil patch, per Energy Secretary Chris Wright.
Speaking to Bloomberg recently, Wright said that the stock market selloff had been overblown, with fears about the global economy “misplaced”. “You see a marketplace right now that is worried about economic growth,” Wright told Bloomberg Television last week. “I think that fear is misplaced.”
There has indeed been a lot of panic in the stock market and commodity markets. Always quick to expect the worst, traders have almost eagerly cut their positions in oil, anticipating demand to nosedive because of the impact of tariffs on consumer spending, inflation, and, consequently, economic growth. It can indeed be argued that the selloff in oil stocks has been overblown in light of the long-term outlook for oil demand, which is quite bright. A long-term view is not, however, the default setting on commodity markets.
Related: Moscow’s New Energy Plan: Oil Output To Remain Flat Until 2050
Yet, leaving the jitters and swings on commodity markets aside, the outlook for the U.S. oil industry—and output—depends on one thing, really. That thing is the duration of the tariffs in general and the Chinese tariffs specifically.
“We need to wait and see what happens over the next quarter or two,” Gabelli Funds analyst Simon Wong says. “I don’t expect drastic changes if WTI falls below $60 and quickly rebounds. However, if WTI falls below $60 and stays there for 2 consecutive quarters, I would expect U.S. E&P producers to start lower capital expenditures and defer production. US production will still likely grow at or around $60, stay flat around $58-$60, but start declining under $55.”
This is pretty much in tune with what Secretary Wright told Bloomberg. He also said, “We are going to see strong growth in American energy production — 100%,” adding that he saw this growth at some 3 million barrels of oil equivalent over President Trump’s term. Yet Wright noted that most of this increase would come from natural gas, in recognition of demand patterns, especially from the Big Tech sector.
The oil and gas industry itself, however, seems not so sure about its growth prospects. According to the latest Dallas Fed Energy Survey, many are not too optimistic about their immediate future. In terms of operating expenses, producers can keep boosting production pretty much across the oil patch, with the survey showing a cost range of between $26 per barrel in the Eagle Ford and $45 per barrel in the Permian. In terms of profitability, however, things look rather different. The oil price range for drilling a well—profitably—starts at $61 per barrel and ends at $70.
Again, if the tariff shock for oil prices only lasts a month or two, the industry will rebound quickly enough, and the rout will only remain a bad memory. Yet, if the effect lasts longer, the outlook for production growth will dim. There are already signs from within the industry that this is what comes next.
“The industry needs to cut immediately and hunker down to let the tariff war play out,” Bryan Sheffield, head of Formentera Partners and son of Scott Sheffield, the founder and former CEO of Pioneer Natural Resources, told Bloomberg earlier this month. Sheffield reportedly described the situation in the shale patch as “a bloodbath” amid the price rout.
“This latest drop seems driven by fears around trade disruptions, slowing global demand, policy missteps by the Trump administration, and just general risk-off sentiment,” Catalyst Energy Infrastructure Fund co-portfolio manager Henry Hoffman says. “But unless those fears start showing up in hard data—like job losses, contracting PMIs, widening credit spreads, or market contagion—a recession isn’t inevitable.”
This is a rather timely point to make in the context of continued fears. All the grim scenarios that analysts and senior officials from institutions such as the International Monetary Fund are not set in stone. They are not inevitable, whatever happens during the 90-day window that Trump gave U.S. trade partners to negotiate individual deals to avoid crippling tariffs.
Yet even if the grim scenarios materialize, the oil industry will not suffer irreparable damage. Production will likely decline, only to rebound when the economy rebounds, which will happen sooner or later. On the other hand, the worst—production cuts—may well be avoided if the tariff spat between Washington and Beijing ends sooner rather than later. Then the only thing U.S. oil producers would need to worry about would be those low energy prices that Trump promised his voters last year.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com
