The GERM Report

-Halliburton says the economy will recover … eventually.

-Enthusiasm to be tested in US shale auction.

The oil economy will recover … eventually. That was the word Wednesday from the chairman of the board at oilfield services company Halliburton, which cut its dividend and enacted a 20% reduction in retainers for front-office brass. Crude oil prices have recovered substantially from a dip into the upper teens. WTI, the US benchmark, survived a contract expiration without a repeat of last month’s disaster of negative pricing and some shale producers are back in action. Refiners, meanwhile, are churning out more fuel as consumer demand picks up. But hold on. Halliburton’s statement, along with comments from top US economic officials, indicates physical recovery will be slow.

The price for Brent crude oil retreated in Tuesday trading to close lower, ending a three-day, 18% rally. The global benchmark for the price of oil was on the rebound again in early Wednesday trading, up some 2.4% at 8 a.m. ET to $35.47 per barrel. Just as Tuesday’s session was influenced by the testimony of top US economic officials, today’s gains will be tested by speeches from US Federal Reserve officials and inventory data.

The American Petroleum Institute reported US crude oil inventories dropped by 4.8 million barrels during the week ending May 15. Refinery runs increased by 229,000 barrels per day, supporting other economic data that show vehicle traffic – and thereby demand – is on the rise. Official data from the US government are released at 10:30 am ET and will help determine the direction of crude oil prices for the remainder of the session.

Halliburton announced Wednesday it set its quarterly dividend lower, to just 4.5 US cents per share, and said its board of directors accepted a voluntary 20% cut in their annual retainer. Jeff Miller, the company’s top executive, said the dividend decision follows a 50% reduction in capital spending, relative to 2019, and reflects the ambiguous economic future.

“The dividend supports our shareholder value proposition by maintaining a reasonable payout as we navigate these uncertain times,” he said in a statement. “More importantly, it places the company in a strong position, financially and structurally, to take advantage of the market’s eventual recovery.”

Eventual is the operative word. The market reaction to the rally in crude oil prices has been one of exuberance, rational or not. Economies are re-opening, manufacturing is returning and traffic patterns indicate consumers are back on the road, as evidenced by the increase in refinery runs. EIA data last week showed US commercial crude oil inventories dipped by a half million barrels, easing fears of overflowing storage. WTI, the US benchmark for the price of oil, survived expiry without a repeat of the April dip into negative territory. But enthusiasm should be tempered. EIA data for last week showed motor gasoline product supplied, a proxy for demand, was down 33%, distillates were down 17.3% and jet fuel was down 68.5% from the same period last year.

We are not out of the woods yet. Speaking Tuesday, Boston Fed Chief Eric Rosengren warned that a too-soon economic return could backfire.

“It is vital that the design and timing of reductions in business restrictions not result in worse outcomes and higher unemployment over a longer period of time,” he said.

Those warnings ring true for the oil sector. Analysts observing the upstream energy sector, one in which companies such as Halliburton dominate, note that quarantine easing is not the same as a return to normal. Companies involved in routine maintenance are still operating on essential staff only. For producers, voluntary restraint and capex reductions are the soup of the day. And on maintenance in general, many energy sector players rely on specialty valves from Italy, the European epicenter of the coronavirus lockdown.

Beneath-the-headline sentiment about recovery in the energy sector will be put to the test on Wednesday when the Trump administration opens a two-day, online auction for drilling rights in New Mexico, the third-largest oil producer in the country. Included in the lots are small parcels of the Permian basin, where producers are already shutting wells. The number of high-bidders in a cautious market may be telling about the spending mood in these uncertain times.