Jul 7, 2020 - Energy & Environment

Oil's coronavirus recovery is stuck in neutral

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

Crude oil is languishing in the "friend zone," and that's not enough for substantial swaths of the ailing sector.

The state of play: U.S. prices have hung out in the roughly $40-per-barrel range (and sometimes lower) for the last month after sharply recovering from the depths of April's price and demand collapse.

Why it matters: "I don’t think that $40 oil is enough to turn around the shale industry," oil analyst Andy Lipow tells the Wall Street Journal.

  • "This price is still not enough to cover all the debt and costs that have been incurred during the boom," he said.

Threat level: There's other evidence that $40-per-barrel doesn't cut it for a number of oil-and-gas companies.

  • An April Kansas City Fed survey of companies in their region found that roughly one-third said they do not expect to remain solvent at $40, even if prices stay there for less than a year.
  • On the brighter side, a Dallas Fed survey in June of companies in their area, which includes Texas, found that the vast majority expect to remain solvent for the next year.
  • However, a number of U.S. companies have already declared bankruptcy during the current crisis.

Where it stands: This morning, Brent crude was trading around $42.92 and WTI at roughly $40.40.

  • The worsening spread of COVID-19 in the U.S. is creating headwinds even as output cuts domestically and worldwide have succeeded in tightening the market.
  • "Over the last few weeks, traders have put more weight on how supply evolves, but from now everyone’s eyes are on demand again and how COVID-19 expands in the U.S.," Rystad Energy analyst said in a note Tuesday.

Yes, but: While low prices jeopardize some companies, Bloomberg reports the shale industry is getting more than $2.4 billion in loans from the federal Paycheck Protection Program.

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