When Hurricane Hermine crossed the Florida peninsula last week, it marked the first time the state has been visited by a hurricane in more than a decade. Fortunately, Hermine was a relatively mild storm. Its 75-mph winds were at the low end of the hurricane rating scale, but it did bring substantial rain, accompanied by storm surge and flooding. Tens of thousands of Floridians lost their power and at least two lives were lost.
After entering the Gulf of Mexico, Hermine’s quick U-turn from a westerly to northeastern track meant that storm preparations by the oil and gas industry were minimal with little affect on the flow of offshore oil and gas. Even before Hermine landed on the Florida panhandle coastline, helicopters were starting to return evacuated personnel to offshore platforms and oil and gas production resumed. The offshore oil and gas output is no longer as important as it once was, so the lost production due to the storm will barely affect overall domestic oil production.
Until the next Gulf storm disrupts offshore output, oil markets will continue to be buffeted by the conflicting pressures of falling production, low levels of new well drilling, increased international oil volumes on the market, and weak demand.
The last point was highlighted by a recent Energy Department estimate of oil inventories. For the prior week, the government said storage increased by 2.5 million bbls. when the oil analysts were only looking for about an 800,000-bbl. gain. At the same time, gasoline inventories – a much-followed metric for U.S. oil demand – increased, which came at the end of the summer vacation and driving seasons. Those negative market forces were tempered by a weaker U.S. dollar that tends to boost commodity prices.
While crude oil prices bounce between the low $40s bbl. to the upper $40s, the offshore rig count struggles. According to Baker Hughes, the offshore rig count last week fell to 10 working units, down seven from the prior week and down 23 from the same week in 2015.
As the industry approaches single digit territory for working drilling rigs, subsistence and survival become the watchwords for the domestic offshore business. If a company is solely dependent on the Gulf of Mexico, survival has been driving activity and strategy for quite a while. The problem is that companies cannot manufacture work when the customers are on a buyers’ strike. You also can’t cut your way to prosperity. We are well beyond the fat-cutting stage. Even muscles aren’t surviving. We are now at the amputation of limbs phase. Until the oil price rallies above $50 bbl. and stays there for a while, hope for the offshore business will not brighten. Hopefully, that won’t be the case for much longer.