Oil Prices Are at a Critical Level After an Early Rally Faded - Barron's

Growth in oil demand has been falling, and analysts expect things to get worse.

Photograph by Christopher Furlong/Getty Images

Oil prices rose for the first time in four days in early trading Wednesday as U.S. inventories rose less than expected, but gave back those gains by midday. Brent crude was down 1.2% to $53.60, while West Texas Intermediate crude was down 0.7% to $49.54.

The volatility came as the stock market was rallying, following a multiday slump tied to fears over the coronavirus. The S&P 500 and the Dow Jones Industrial Average were up 0.6% in noon-hour trading.

Oil is hovering around crucial price levels. West Texas crude is below $50 after a three-day slide. If it remains at $50 or below, some explorers and producers could slow drilling or at least think twice before starting on new wells. The Dallas Fed said last year that the breakeven price for new wells drilled in the U.S. is $50.

That doesn’t mean that all drilling will cease at that level. The breakeven price ranged from $23 to $70 in the Fed’s survey. But low prices could lead to enough of a drilling slowdown that worries about oversupply would fade—and ironically lead to higher prices that might convince producers to start putting equipment to work again.

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Still, supply isn’t the real concern here. Growth in oil demand has been falling, and analysts expect things to get worse. Goldman Sachs analysts just reduced expectations for global oil demand growth this year to 600,000 barrels from 1.2 million barrels.

Oil companies need higher prices so they can generate enough cash to make their debt payments, according to analyst Edward Moya at currency broker OANDA.

“Explorers and producers have over $85 billion in debt maturing between now and 2024 and they won’t be able to be profitable if oil does not stabilize soon,” Moya wrote. “This is a make-or-break moment for the oil industry and in order for higher oil prices to occur, central banks need to deliver a wrath of stimulus, OPEC + must deliver deeper production cuts next week, the global spread of the virus needs to ease.”

Write to Avi Salzman at avi.salzman@barrons.com

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