How many times can you say "unprecedented?" The COVID-19 pandemic has resulted in a massive reduction in global oil demand, yet production cuts haven't kept pace. As predicted, the world is running out of oil storage capacity and that reality is now being reflected in crude prices. It really seems like an understatement to say the recent plunge in WTI prompt futures contract price trading near negative $40/bbl was "unprecedented", but so it was.

Until supply and demand are back in balance, oil will not only remain below breakeven drilling prices, but will be below the cost of operating many existing wells. So, what needs to happen to restore oil markets?

"Until supply and demand are back in balance, oil will not only remain below breakeven drilling prices, but will be below the cost of operating many existing wells."

Although part of the problem has been oversupply caused by the rapid growth in U.S. production over the last several years, and the unwillingness of OPEC+ to continue to cut their production to stabilize prices, that's insignificant compared to the demand destruction caused by the pandemic. Until the public health situation is under control, through improved testing, treatment and ultimately a vaccine, we can expect people to travel much less and demand less fuel. Oil demand will return, hopefully sooner than later, but until then the only response to balancing global markets is to reduce supply.

In Texas (which accounts for 40% of U.S. oil production), it’s the Railroad Commission's responsibility (among other things) to prevent the waste of resources. Despite pleas from many industry leaders at the Commission's virtual meeting regarding prorationing last week, it doesn't seem likely to me that they’ll use their authority to reduce production to help stabilize prices.

We should expect to see operators take immediate action to reduce production, however. The rig count will continue to fall and operators will begin shutting in or choking back wells. Much of this will be in response to the simple fact that there’s no place for all of this production to go so it’ll need to stay in the ground until demand is restored. The downside to this limited and uncoordinated response is that it may not reduce supply enough to quickly stabilize prices at a level that allows many companies to continue operating. Unfortunately, the related job losses will likely lead to further economic damage.