New Mexico’s oil and gas industry could take at least three more years to fully recover from a historic collapse brought on by the COVID-19 pandemic and subsequent shrinking fuel demands.
Bernadette Johnson, vice president of market intelligence at Enverus said the market for crude oil likely won’t recover to pre-pandemic levels until 2023 when the price per barrel of West Texas Intermediate – a grade of crude used as a domestic pricing benchmark – was between $50 and $60 per barrel.
In April, the price dropped to below $0 per barrel but by July had recovered to about $40 per barrel.
But Johnson said it was unlikely the price would continue to climb quickly, as fuel demands were slow to increase during the ongoing pandemic.
She said the resolution of a price war involving Russia and the Organization of Petroleum Exporting Countries helped drive the price up earlier this, due to agree-upon supply cuts.
If that hadn’t happened, Johnson said the price per barrel of crude oil could still be below $20 per barrel.
She presented predictions for the oil and gas markets and how New Mexico could be impacted during a Wednesday meeting with New Mexico Legislative Finance Committee held in Cloudcroft.
“Crude prices have staged a pretty impressive recovery this month compared to where we were several months ago,” she said. “It’s been volatile. This environment we’re in is historic but it’s also historic for oil and gas prices. We’ve never seen this level of disruption.”
Johnson pointed to a continual drop in the number of active drilling rigs across the U.S.
Records show the U.S. had 246 active on-land rigs as of July 10, per the latest data from Baker Hughes, compared with 930 last year.
The Permian was at 125 rigs as of July 10, compared with 437 last year, records show
This could mean a future recovery, Johnson said, as more rigs mean more supply and when the rig counts drop the supply also decrease, driving up the price.
“One of the best indicators of future supply is the rig count,” she said. “Even the rigs that are running, they’re drilling those wells and they’re holding them back and not completing them.”
And widespread well shut-ins were brought on by the shrinking demand at refineries that process crude into fuel.
Since gasoline demand in the U.S. saw a dramatic drop, refineries are buying less crude, Johnson said, leading to wells being shut in and deactivated.
“Gasoline demand in the U.S. fell off a cliff. Very few people were filling up their tanks for several months. That means refineries stop buying crude,” she said. “That happened very quickly.”
It will be until 2023 and 2024 until the market starts to see a recovery back to pre-pandemic prices, Johnson said.
“We are expecting a price recovery. Once we get to 2023 and 2024, the price is going to look significantly better. It’s not going to happen quickly and it’s not going to happen overnight,” she said.
“What we’re looking at in this state is a budget shortfall for a pretty significant amount of time. This is going to impact every state that relies on oil for revenue.”
Oil and gas operators themselves should largely be able to weather the economic impact of the pandemic, Johnson said, as many cut production to address the supply glut that drove prices downward in spring 2020.
“They cut costs, they cut rigs. They can sustain in this low price environment. They’re not burning through cash,” she said. “It’s not a dire situation for many of the companies out there. We will see some more bankruptcies, but it’s not going to be widespread.”
New Mexico Rep. Patricia Lundstrom (D-9) of Gallup called for another update for the Committee on the oil markets this winter.
“I think this is very important information and I would like to see us have another presentation like this in December or so,” she said.
New Mexico Sen. William Burt said the lawmakers were working to address the budget shortfall and economic impact of the pandemic, as Wednesday’s meeting also covered potential plans to reopen public schools and how the state could make up the budget shortfall using federal relief money
“We are working diligently to find answers and solutions in how to get back our economy and our lives back to normal under these restrictive health orders,” he said. “I am also anxious to examine how the federal government’s stimulus funding plan is working in New Mexico.”