May 18, 2020 - Economy

Oil prices reach two-month high as producers throttle back output

Illustration of oil barrels acting as smoke stacks

Illustration: Sarah Grillo/Axios

U.S. oil prices are above $30-per-barrel for the first time since mid-March as producers cut output while demand continues recovering from its April depths as restrictions are eased.

Why it matters: The increase eases pressure on the industry, but hardly alleviates the distress as prices remain below profitable levels for many producers and analysts caution that the recovery is shaky.

  • Indeed The Wall Street Journal reports that Gavilan Resources LLC, the oil-and-gas producer formed by the Blackstone Group, cited the price collapse in filing for Chapter 11 bankruptcy protection Friday.

Driving the news: Futures prices for West Texas Intermediate have risen to roughly $32 per barrel since markets reopened Sunday evening, adding to last week's gains. The global benchmark Brent crude is at $34.50, its first foray above $34 since early April.

The big picture: "Producers are significantly throttling back output and, with demand increasing, the market is on a slow path towards recovery," Rystad Energy analyst Paola Rodriguez-Masiu said in a note.

  • In addition to the OPEC+ output-cutting pact and some OPEC members vowing to go beyond it, producers outside the group are curtailing the flow of oil faster than expected, she said.
  • In particular, operators in the U.S. have announced production shut-ins of at least 1.2 million barrels per day in May and June.

Threat level: This wide-angle New York Times piece notes that despite the modest recovery, the historic collapse in demand and prices will exact a heavy toll as some companies go bankrupt.It summarizes the views of KPMG analyst Regina Mayor, who "expects a prolonged price slump that will force the American oil industry into a major restructuring."

The number of active U.S. oil rigs fell by another 34 units to 258 last week, compared to over 800 a year ago, per the latest tally by the oilfield service giant Baker Hughes.

  • While producers are shutting down some existing wells, the rapidly falling drilling rig count is a sign of how companies are also slashing plans for future production.
  • The Energy Information Administration projects U.S. production, which was nearly 13 million barrels per day at the end of 2019 but now falling fast, dropping below 11 million this year and staying there deep into 2021.

Go deeper: Oil's risky recovery and the damage done

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