At no time in the history of America has her population been as confused or scared to resume work or life as it used to be—without fear and little care. And that’s a bigger problem for the U.S. oil industry than convincing regulators in the largest crude producing state, Texas, to mandate cuts that could move the market higher.
By this weekend, more than half of the 50 United States will have reopened for business in one way or another, nearly six weeks after social distancing and lockdowns began in earnest across the world’s largest economy, to try and curb the spread of the coronavirus.
But instead of the picture of broad positivity that optimists would have liked, the reports, images and soundbites cropping up in the media together show a jarring and chaotic narrative of a Back-to-Work America. Plus, politics are also influencing the decisions on the ground.
US Reopening: Different Rules for Different Color States
The red, or Republican states aligned to President Donald Trump are most relaxed in their reopening. Some are virtually unconditional, matching his agitation that the lockdowns come off. The president, who will be seeking a new term in six months, has also decided not to extend the social distancing guidelines espoused by the White House over the past 45 days.
In North Dakota, the second largest oil producing state after Texas, Governor Doug Burgum will fully reopen the economy from today, including for gyms, restaurants, hair salons and other close-contact businesses.
In Texas, Governor Greg Abbott has decided that retail stores, movie theaters and malls can reopen from today, along with restaurants for dine-in service, although some restrictions will apply.
In Oklahoma, another major boom town for shale oil, Governor Kevin Stitt has already allowed hair and nail salons, pet groomers and spas to reopen as of last week, while other nonessential businesses will resume operations from today.
In Iowa, Governor Kim Reynolds has ordered workers to return to their jobs or lose unemployment benefits, despite warnings that reopening could lead to a second wave of infections.
Nearly all the blue, or Democratic states are, meanwhile, continuing with strict preventive measures against the virus, prompting protests by Republican-aligned groups in those locations.
Massachusetts, with Republican Governor Charlie Baker, was the exception. He faced fierce protests outside his home on Thursday for delaying a return to work by this weekend. The Republican governor also extended a curfew in Boston through May 18.
In Louisiana, where a key offshore oil port for the U.S. Gulf of Mexico is located, Governor John Bel Edwards has extended stay-home directives through May 15.
In New Jersey, the newly-evolving U.S. epicenter for COVID-19 outbreaks after New York, Governor Phil Murphy plans to reopen in a “number of weeks.,” He adds: “I would not say it’s a number of months, but I’d also remind folks that these viruses come back.”
In New York, Governor Andrew Cuomo announced a 12-step regional reopening plan, with upstate areas like Albany slated to reopen some businesses in mid-May. New York City’s closure remains indefinite for now.
Second Wave of Infections Likely
There is plenty of evidence out there on why the reopenings need to be handled carefully.
Singapore, the wealthy Southeast Asian city-state, was lauded as recently as late March, for being a success story in the battle against the coronavirus with just 509 cases and two deaths since a January outbreak.
But in a second wave of infections, Singapore has been hit with more than 16,000 cases, and the nation of 5.7 million now has the highest recorded infection rate in Southeast Asia, according to the Washington-based Center for Strategic and International Studies.
“The U.S. is not yet at a point that we can safely reopen,” said Jeremy Konyndyk, senior policy fellow at the Center for Global Development, an expert on humanitarian assistance for pandemics. “We’ve got it down to one new case for every existing case, but we need to get it down to below that to be up and running,” he said, referring to the more than one million U.S. infections cases and 63,000-plus deaths from the virus.
But Oil Needs Urgent Action
But the U.S. oil industry does not have time on its side. Industry analysts warn that at least a dozen companies in the business, from drillers to those providing various services, were vulnerable to bankruptcy due to this year’s 70% slump in WTI.
Reuters reported on Thursday that Oklahoma-based Chesapeake Energy (NYSE:CHK), a pioneer driller in U.S. shale oil, was preparing to file for bankruptcy after similar action last month by Colorado-based Whiting Petroleum (NYSE:WLL).
While uniformity in reopenings is almost impossible to achieve given the peculiarities and dynamics of each state’s exposure to the pandemic—not to mention the politics involved—oil markets need critical and concerted economic action if this week’s rebound is to continue.
Oil is the commodity that literally powers and moves the world, but it also depends on an actively working, commuting, driving, flying—even partying—society to keep it flowing. After seeing subzero prices for the first time ever last week, the result of demand destruction caused by the COVID-19, US U.S. West Texas Intermediate crude futures have jumped more than 50% in the past three days to breach $20 per barrel in Asian trading on Friday. The last time WTI saw such prices was exactly two weeks ago.
The rebound was inspired by a mix of happy news on progress achieved over a potential drug for acute COVID-19 patients; a lower-than-expected weekly build in crude stockpiles; an unexpected weekly drawdown in gasoline stockpiles; and production cuts. The last was the result of output reductions in the United States from shut-ins of oil rigs and wells and—more importantly—cuts by an alliance of global producers led by the Organization of the Petroleum Exporting Countries. While U.S. producers are largely symbolic contributors to the OPEC-led cuts, the global oil reduction, which officially begins today, lends strong moral support to WTI.
That's the good news for U.S. crude. Everything else for WTI’s future hangs on a prayer that America’s working population and economy will fix itself in the coming days, weeks and months, and that a second major coronavirus wave doesn’t hit the United States.
Economy Not Helping
Already 30 million people, or roughly 20% of the country’s original workforce, have been laid off in the past six weeks and the economy has tanked 4.8% in the first quarter. A recession is certain to come next, with both Trump administration officials and Wall Street forecasters broadly agreeing that the April-to-June period will be the worst quarter ever for the U.S. economy.
“Globally, we are at the inflection point where we are past the worst for oil demand destruction but not for supply destruction,” said Olivier Jakob of the Zug, Switzerland-based oil risk consultancy PetroMatrix.
Fellow Swiss Igor Windisch, who authors the IBW Oil Brief out of Geneva, concurs, saying that while he’s an optimist on oil, “it is important to weigh all elements at hand with proper perspective.”
"The actual facts of massive unemployment, companies laying offs, sales down – will have an effect which has been forgotten in (the) euphoria. Draws in gasoline stocks is great news, but this is one week only, and tanks are almost full. Gilead (NASDAQ:GILD) drug results are great but this is not a cure, this is not a vaccine.
OPEC+ cuts will start to bring support to prices. But for how long? How much of those cuts are already priced in? I would say all of it.”
But Windisch adds that he understands the urgency of producers and oil bulls to get the market back up.
“I’d say that as much as we should not underweight the fundamentals, we should not underestimate the firepower of charging bulls who have long been waiting to action that buy button.”