Dallas Fed Sees Tariff Pressures on Break-Evens

Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--A tariff on steel imports into the United States is making it more expensive for oil and gas drillers to make a profit, the Federal Reserve Bank of Dallas reported.

The Dallas Fed on Thursday said the break-even price for upstream companies varies widely, increasing from $58 per barrel in 2024 to $61 per barrel at the start of the year. Smaller companies may need oil as high as $70 in some parts of the Permian.

Even higher prices may be necessary given the impact of tariffs. U.S. President Donald Trump slapped a 25% tariff, an import tax, on aluminum and steel. U.S. steel manufacturers don't produce many of the steel tubular goods necessary for the energy sector, and those products typically account for as much as 15% of drilling and completion costs, the Dallas Fed noted.

West Texas Intermediate (WTI), the U.S. benchmark for the price of oil, was trading at around $58 per barrel on Friday, its lowest point since February 2021, barely a year into the pandemic.

The Dallas Fed said that it was already expecting some layoff announcements at the beginning of the year due to recent trends in mergers and acquisitions. But if WTI stays below the mid-$60 per barrel range, more layoffs are expected, it said on Thursday.

An early-year report from the Dallas Fed found the energy sector was frustrated with Trump's policies even before the April announcement on tariffs. A "drill, baby, drill" mentality does not make sense when oil prices are hovering in the mid-$50 range, respondents said.

What's more, there's usually a lag time of about a year before prices start to have any meaningful impact on production so the current market could limit U.S. output by next year. Though lower production can stimulate the market, the Energy Information Administration, the statistical arm of the U.S. Department of Energy, expects WTI to average $58 next year.

While elevated compared to decade-ago levels, U.S. crude oil production is on pace to increase by 0.3% from current levels by 2026. Production increased 1% from 2015 to 2016.

Price movements have caught the recent attention of the World Bank, which said oil-price volatility is greater than it's been in 50 years.

"The combination of high price volatility and low prices spells trouble," said Indermit Gill, the World Bank Group's chief economist and senior vice president for development economics.

When adjusted for inflation, the World Bank added that global commodity prices are below the five-year average to 2019, the year before the COVID-19 pandemic.

That, in turn, is showing up in quarterly financial reports. Exxon Mobil Corporation (NYSE:XOM) (Spring, Texas) on Friday beat analyst expectations with $7.7 billion in earnings, outperforming the fourth quarter. Earnings, however, was down 6% from first-quarter 2024.

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