The coronavirus pandemic has emptied out cities around the world, causing a historic drop in oil demand just as production was reaching new highs. WSJ explains the oil bust (opposite of oil boom) that could reshape energy markets.
Small U.S. oil companies are shutting off wells faster than expected, as prices fall below what it costs them to pump the crude out of the ground.
The shut-ins by smaller companies are a major reason U.S. oil production, which has recently led the world, is now projected to fall substantially in the coming months.
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What is an Oil Bust? From
We’ve all heard the basics of supply and demand. When one goes up, the other tends to fall. That much is simple. But in the case of petroleum prices, and the complex global events, which constantly influence them, there’s nothing simple about it.
WHAT’S A BOOM AND WHAT’S A BUST?
A boom is when oil and/or natural gas prices drastically rise to the point where drilling rigs, refineries and the crews that run them kick into full production. That’s generally when supplies have dropped and demand has risen to the point where production is more profitable. A bust is just the opposite.
In November 2017, the United States’ crude oil production exceeded 10 million barrels per day for the first time since 1970, according to the US Energy Information Administration (EIA). Analysts predicted that the U.S. could become the world’s largest oil producer in 2018, surpassing Saudi Arabia and Russia.
As oil producers in North America were expanding output, supply was increasing, but so was demand. Unlike national oil companies and oil majors that typically take five to 10 years to develop conventional oil reserves, these independent and “unconventional” players had improved their drilling and fracturing technology to the point where they were responding within months to temporary spikes or dips in the market.
In 2020, the onslaught of two black swan events, the pandemic along with a pricing battle between Saudi Arabia and Russia, came together to create a historic oil bust, unlike any previous bust. The oil bust drove prices down into a historic low in April and the excess production was causing storage issues. No previous oil bust had such a calamity of negative issues all at once.