West Texas Intermediate (WTI) spot prices plunged 7.5% to the 19-handle on Sunday evening, hitting lows not seen since 2002.
WTI has crashed 70% in the last 56 trading sessions amid the COVID-19 crisis triggering a demand bust across the world. As a result, an economic storm risks triggering a shale debt bomb in Texas, jeopardizing the state’s $1.8 trillion economy and may damage crude output from the Permian basin that has more than quadrupled in a decade.
In three weeks’ time, Saudi Arabia and Russia launched an oil price war that has sent WTI prices tumbling 57% and now risks imminent doom for US shale (and its junk bonds). More specifically, Texas accounts for 42% of US crude output and has been hit with twin shocks: one from waning crude demand, and another from the COVID-19 outbreak forcing the state to issue a “stay at home” public health order – restricting the travel of residents.
The collapse in oil prices this time around is more unique than past ones, mostly because demand has evaporated overnight due to a pandemic with no clear timetables of when it will return. A major concern for producers is that the recovery might not be V-shape…
“As much a tragedy as the coronavirus is, most states are dealing with one problem. Texas is dealing with two because we’re dealing with coronavirus and the dramatic drop in oil and gas prices,” Dale Craymer, president of the Texas Taxpayers and Research Association and a former state budget director, told Financial Times.
Plains All-American, a pipeline company, was offering WTI per barrel for $17.50 on Friday, a drastic discount from $63 in January. Drillers need about $49 per barrel to stay profitable, a prolonged downturn under $40 for several years could bankrupt 40% of all US shale.
Texas has been diversifying into other industries such as healthcare, transport, and technology, to make its economy more resilient if oil prices fall. Every $1 decline in WTI price equates to an $85 million loss in tax revenue per year, Craymer’s group estimates.
For the current budget cycle, Texas was expecting oil and gas taxes would generate $5.5 billion, of which $1.6 billion would be transferred to an emergency fund. However, the budget cycle was based on $58 oil prices.
The state is expected to start drawing from its emergency fund as oil and gas taxes plus sales taxes will be significantly lower as the pandemic has likely triggered a depression in the US economy for the second quarter.
To make matters worse, 155,000 Texans filed for unemployment benefits last week, the most significant increase in a given week in more than three decades.
“As far as the ‘Texas Miracle'” — the state’s oft-touted outperformance of the rest of the US economy — “it’s on ice for the time being,” Craymer said.
Texas oil output is expected to decline in the second half of the year as investments in exploration and drilling contracts are reduced or canceled.
“My outlook on the domestic oil and gas industry has never been bleaker,” one executive told the Dallas Fed. Another grimly joked: “What is the difference between a Texas oilman and a pigeon? The pigeon can put down a deposit on a new Mercedes.”
We noted that Mizuho’s Paul Sankey estimates that the global oil market is incredibly oversupply, and “crude prices could go negative as Saudi and Russian barrels enter the market.”