Oil prices (CL=F) fell below $19 a barrel on Friday after China reported its economy shrank by 6.8% in the first quarter, the latest sign coronavirus is disrupting economies worldwide and decimating global demand for crude.
Parsley Energy (PE) CEO Matt Gallagher told Yahoo Finance the recent drop in crude has been an “unprecedented slide,” equating the decline to a “train wreck in full speed.”
Earlier this week, the OPEC-plus cartel reached a deal to cut supply by 9.7 million barrels a day in an effort to offset the drop in demand from the outbreak. But Gallagher said that while it’s a good first step, it’s simply not enough, and it’s time for the U.S. to step up and do its part.
“Coronavirus is a 30 million barrel per day demand shock,” said Gallagher. “A global pandemic requires a global response. OPEC already took a stab at it... They pressed pause on their price war. Now Texas should lead, and other states should follow, in temporarily prorating production. It is clear that action across the globe is needed and the time to act is now.”
What Gallagher is referring to is Parsley Energy’s call for the state of Texas to issue an oil production cut, a step that has not been taken since the 1970s. The Railroad Commission, which oversees Texas’ oil and gas industry, discussed the proposal earlier this week and is expected to reach a decision by the end of the month.
The risk of rising unemployment was a major sticking point in the hearing.
Parsley Energy argued that failing to enforce production caps could put jobs at risk, stressing the United States needs to protect its workers while sending a unified message to the world.
“There are 360,000 employees of the energy sector just in Texas alone,” Gallagher said. “We have over 3,000 operators in Texas. We need to communicate to the globe that we are pulling back our volumes.”
Balance sheets at risk
Depressed oil prices have forced many oil and gas producers to cut their dividends and capital spending as they look to protect their balance sheets in the face of escalating financial losses. Parsley Energy has cut its capital investment dramatically, “[by] over 66% on a forward looking basis,” in an effort to try to align supply with demand.
And Parsley Energy is far from alone. Oil giant Exxon (XOM) slashed $10 billion from its 2020 capital spending plan, while eleven other of the biggest oil and gas companies cut nearly $34 billion from their plans, according to data compiled by S&P Global Market Intelligence.
While it may seem to many that the situation can’t get much worse for the oil industry, Gallagher is quick to disagree. He warns of more pressure on balance sheets if production is not scaled back, saying that if storage facilities and pipelines reach their maximum capacities, prices could fall even more dramatically.
“We might see single digit oil prices by May,” he said. “That’s what we’re trying to avoid as an industry with this proration effort.”
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Seana Smith is the anchor for The Ticker. Follow her on Twitter @SeanaNSmith
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