Texas Railroad commissioner Ryan Sitton joined Tudor, Pickering, Holt & Co.'s C.O.B. Tuesday series—"industry and market commentary posted every Tuesday"—on April 21 to discuss what is happening in the railroad commission and the oil and gas industry due to the COVID-19 pandemic.

Sitton told host Maynard Holt there is currently an imbalance of supply and demand that could prove troublesome.

“The challenge from a macro perspective for a government official is this: Is there something that might or might not happen in the market due to this massive imbalance of supply and demand that might have a long term detrimental effect to the entire industry?” Sitton said “I do believe that there’s going to be a long-term detrimental effect that’s going to take years to work out.”

Sitton wants people to know this is not a normal market, and without storage space there could be big issues for the oil and gas industry in the U.S. as we recover from the economic fallout of the crisis.

“As refining runs are dropped 13-14 million barrels a day in the United States, with storage filling up, without excess capacity, we’d have to drop production to 7-8 million barrels a day so that refiners have enough heavy crude to blend with that and still run their refineries at 13-14 million barrels a day,” Sitton said. “At seven million barrels a day, I don’t know what price of crude we would see. We might be in the $1-$3 a barrel range for a while. The damage might last for years, even a decade. That’s the rationale everyone is trying to wrap their heads around.”

He compared the oil and gas industry's storage situation with Saudi oil still coming in to how restaurants would be affected if shut down completely for an extended period of time.

“Right now, you go out and see government’s basically shut down all restaurants. If you told those restaurants, 'You can’t do any business at all,' [then they’d say,] ‘There’s no work to do anywhere. I can’t pay rent, I have zero employees. My loans are coming in…’ Then you tell them they can open up. 'They’ll say, 'It’ll take months for me to open up.'

"But if the government were to allow businesses to stay open and keep serving, with limitations, it could be less of a shock. However, if you said there’s going to be some limitation, but you can keep a basic operation going, to-go food, you get a small skeleton crew, rent’s paid. When it’s time to ramp up, you can do so very quickly.”

That was, he said, a long explanation of his meaning. “I do think there’s going to be some long-term detrimental impact to the industry that may take a decade to work out,” he said.

Sitton proposes proration until demand hits a certain level. He suggested 85 million barrels as that level.

His big fear is when demand starts to come back and the industry gets to 85 million barrels a day, the damage and changes from the coronavirus shutdowns will mean the industry does not have the ability to bring oil back to the market.

He fears oil might spark to $120 per barrel and public sentiment to high gas prices might be untenable even during a recovery.