Oklahoma's Oil Industry Could Face 'Worst Case Scenario'
Oil prices have stabilized after an unprecedented plunge last week, but economists are still forecasting a grim scenario for Oklahoma, which relies heavily on the oil and gas industry. Journal Record editor Russell Ray discusses last week's negative oil contract prices, as well as what measure the state is considering to mitigate the problem.
Drew Hutchinson: This is the Business Intelligence Report, a weekly conversation about business news in Oklahoma. I’m Drew Hutchinson. Joining me by phone again this week is Russell Ray, editor of The Journal Record. Russell and I are both continuing to work from home. So how’s it going, Russell?
Russell Ray: It’s going great. The staff at The Journal Record is still working remotely, and we’re staying safe and healthy.
Hutchinson: That’s great to hear. So today, we’re talking about how COVID-19 could affect Oklahoma’s oil and gas industry. The oil futures market has recovered a bit after a day of unprecedented lows last week. But economists are saying that already grim forecasts could easily turn into a “worst-case scenario.”
Ray: Well that’s right. The probability of this turning into a worst-case scenario certainly went up after what happened last Monday on April 20th. Oil prices since then have rebounded and some states, including Oklahoma and Texas, are looking at limiting oil production to preserve its value for oil producers. But when you look at the futures market, many of those prices are indeed in line with the worst-case scenarios provided by some forecasters. One research firm, IHS Markit, is projecting WTI oil will average about $12 a barrel in the second quarter.
Hutchinson: What’s interesting here is that one economist, Dan Rickman, actually was forecasting a more optimistic scenario created by different numbers, but that was before the prices plunged last Monday when the May contract for West Texas Intermediate crude, which is the benchmark grade of oil in the U.S., as you mentioned, traded and closed in the negatives.
Ray: Yes. The worst case scenario is certainly more likely. But I think it’s important to note that the negative price of oil was a result of the paper market. Futures contracts for May were about to expire and many investors had so much oil already that they were willing to pay someone to take the oil off their hands. And that led to the negative pricing for oil. But it didn’t mean that oil had a negative value. It meant the contracts had a negative value because many investors desperately wanted out of those contracts.
Hutchinson: Right. So according to Robert Dauffenbach, the director of the University of Oklahoma’s Center for Economic and Management Research, the situation will remain grave as long as the economy is shut down. And there aren’t really many questions surrounding the sharp drop-off here. Major cities are on lockdown, which means people aren’t using their cars as much, aren’t purchasing as much gas, and air travel has also been curtailed. However, the pumps are still running, and it’s leading to too much oil. So Russell, what does this mean for Oklahoma? And how are oil producers here reacting?
Ray: Well we do have a big glut in oil supplies here in the state, and that’s where in Oklahoma, some oil producers have asked the Corporation Commission to consider cutting production from Oklahoma oil wells to help mitigate what they describe as economic waste. In fact, the commission recently approved an emergency order that allows oil producers to shut in their wells or cut production without losing their leases on those wells. Without that order, slowing production would have put producers at risk of losing their leases, even if oil prices fall below the break-even cost of production. And a hearing on a more permanent order is scheduled for May 11 before the Corporation Commission.
Hutchinson: That’s right. Russell, again, I want to thank you again for your time today.
Ray: My pleasure, Drew. Thank you.
Hutchinson: Russell Ray is editor of The Journal Record. KGOU and The Journal Record collaborate each week on the Business Intelligence Report. You can follow us both on social media. We're on Facebook, Instagram and Twitter: @journalrecord and @KGOUnews. The story we discussed today is available on JournalRecord.com. And this conversation, along with previous episodes of the Business Intelligence Report, are available on our website, KGOU.org. While you’re there, you can check out other features and podcasts produced by KGOU and our StateImpact reporters. For KGOU and the Business Intelligence Report, I'm Drew Hutchinson.
The Business Intelligence Report is a collaborative news project between KGOU and The Journal Record.
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