Over recent years, the COVID crisis created a highly tumultuous situation for many companies and industries. Some, such as airlines, took a much larger hit than others as travel demand collapsed worldwide. Fortunately, it appears that era is ending as U.S. case growth has fallen back to low levels, mask mandates are finally ending, and large numbers of people renew their old travel habits.
Unfortunately for airlines, it appears they are leaving one crisis and entering a new one. The recent Russian invasion of Ukraine will likely deter some European travelers. However, more importantly, it is causing a severe decline in global oil production and sales. This issue is described in more depth in “XLE: How The Russian Invasion Of Ukraine May Impact Energy Markets.” To summarize, it appears there is a strong possibility of a 5-10% decline in global oil output due to the effective embargo on Russian oil as well as issues transporting oil through the Black Sea. In my view, if this situation is sustained too long and Russia’s oil storage capacity is filled, then the country will need to shut down oil wells, leading to an extended decline in output.
Unless the U.S. and OPEC manage to increase production drastically, it appears the global energy shortage will become much worse. As mentioned in other research, it is generally unlikely that U.S. oil producers and OPEC will make up for losses in Russia any time soon as it takes months and money to drill new wells. Of course, we know U.S. producers are still avoiding drilling as drilled-but-uncompleted oil well inventories have consistently fallen over the past two years. In my view, this is a vital sign that energy producers in the U.S., and likely abroad, are struggling with minimal free capital to pursue capital expenditures and the potential inability to grow production due to the industry’s significant labor shortage.
The situation in the energy market is critical for airlines since…