West Texas Intermediate crude prices are surging today, 3.1% in afternoon trading, as Hurricane Sally bears down on the U.S. Gulf Coast, putting both offshore oil production, and the dozens of refineries along the coast, at risk. Brent Crude, a benchmark for European oil that plays a major role in setting global oil prices, is also up more than 2% today.
The rise in oil prices is carrying over to oil stocks. The SPDR S&P Oil & Gas Exploration & Production ETF (NYSEMKT:XOP), which tracks the oil producers in the S&P 500 Index, was up more than 1% for much of today's trading. Occidental Petroleum (NYSE:OXY) shares are up 5.3%, while shares of Matador Resources (NYSE:MTDR) and Devon Energy (NYSE:DVN) are up more than 2% on the news.
Temporary boost in oil prices not likely to fix oil producers' woes
2020 has been a brutal year for the oil and gas industry, but especially for independent producers and production-heavy integrated majors like Occidental. The collapse in oil demand and prices this spring left many exposed to the implications of an oil market that they couldn't make money in.
Today, many investors are hoping that today's surge in crude prices will last beyond the temporary impact of a hurricane outage for offshore production and refinery activity.
That outcome seems rather uncertain and is probably unlikely to occur in the current environment; simply put, the problem continues to be weak demand. Last week, the U.S. Energy Information Administration's weekly petroleum report painted a pretty weak picture of muted demand demand for transportation fuels exiting the peak summer season.
Global heavyweights entering the ring
The past several days have brought even more bad news that has much bigger long-term implications for U.S. oil companies.
Last week, Saudi Arabia slashed oil prices to Asia and the U.S., aggressively acting to take market share to offset China's reduced crude buying after the second quarter's spending spree. The pivot to U.S. refiners is particularly notable. Saudi Arabia, with the largest, cheapest oil reserves on earth, had largely ignored the world's second-biggest oil consumer in the second quarter.
Over the weekend, Libya, which has spent most of the year with almost all of its oil production blockaded by factions battling for control of the country, announced it was reopening its oil ports. The addition of Libya's production, which has been shut in since before the coronavirus pandemic, could add another 1 million barrels of oil per day to the global oversupply in the months ahead.
Adding a cash-starved Libya to the mix, along with the low-cost gorilla in Saudi Arabia that's going to fight for as much market share as it can, and U.S. oil companies face a difficult road forward.
Matador has some things in its favor, including hedges on just under half of its oil production that allow it to realize $48 per barrel on that oil. Devon is in an enviable position, able to cover its operating costs with oil around $35 per barrel, and has maybe the strongest balance sheet in the industry. That will go a long way toward helping both companies ride out what could prove to be a brutal rest of 2020.
For Occidental, it gets more complicated. The company does have some very low-cost oil production, but its plan had counted on crude prices at or above $40 per barrel in order to maintain its production, sell off some assets, and start chipping away at its massive $36 billion in debt (nearly $5 billion of which it must repay next year).
So while all three have some advantages in low-cost and hedged oil production, the continuation of weak demand as the coronavirus pandemic threatens to intensify could result in Saudi Arabia and its OPEC cohorts, along with Russia, battling over market share, using their pricing power to bludgeon higher-priced U.S. shale out of the way. If the fight for market share intensifies, U.S. producers won't be able to compete.