Analyst: US oil producers might start cutting production

Analysts at energy consulting firm Rystad Energy say the recent plunge in US oil prices — benchmark West Texas Intermediate has dropped about 15% to roughly $60 a barrel over the last three sessions — could prompt oil producers in the oil- and gas-rich Permian Basin of West Texas to cut production. The analysts write:

“Already modest growth could be at risk if prices remain near $60 per barrel. Rystad estimates that the new ‘all-in’ breakeven cost for many US oil players is now above $62, which includes higher hurdle rates, dividend payments and debt service costs. With Lower-48 production growth already unlikely outside the Permian, a downshift in the country’s most prolific oil basin would decelerate the rate of production growth in 2025, should prices remain subdued.

The business model embraced by US oil producers over the past several years becomes far more difficult to maintain with prices below this level. This means that some combination of near-term activity levels, investor payouts or inventory preservation will need to be sacrificed in order to defend margins. While different companies have different sensitivity to the above factors, activity and production will be threatened the most.”

While sharp sell-offs in trade-exposed parts of the market, such as technology stocks like Apple and retail-related stocks like Nike and Target, have received a lot of attention since the Rose Garden rout began, it’s actually energy stocks that have been the worst performing of the S&P 500’s 11 “sector” breakdowns.

In fact, the single worst-performing S&P 500 stock of the last few days has been APA Corporation, a Texas-based shale driller active in the Permian Basin. It’s down nearly 30% since the April 2 announcement.

The industry’s woes would be a somewhat surprising result for the oil and gas companies and executives that were heavy donors to the Trump reelection campaign. The president ran, in part, on a promise of boosting US production and ensure “energy dominance” of the American industry. On the other hand, he also promised to deeply cut the energy costs American consumers pay, and the recessionary pricing of oil means he’s made some progress there.