President Trump hosted oil company executives on Friday in a White House meeting to discuss how to save the markets from collapse. A sudden and precipitous drop in demand now threatens markets causing a massive glut, leading to a collapse in petroleum prices.
Such a drop in oil prices isn’t the good news it seems to be. President Trump on Friday signaled that he would back off his previous stance that drops in oil prices represent a de facto tax cut for consumers, as the breadth of the industry-wide crisis came into focus.
This meeting comes as Saudi Arabia and Russia remained locked into efforts to collapse each other’s petroleum markets. Saudi Arabia has ramped up production to cause a collapse in prices. This would have a strong negative effect on Russia’s economy, which heavily relies on oil exports.
On Thursday, Trump said he expects both countries to cut production to save the international petroleum markets:
Trump said he had spoken to Saudi Crown Prince Mohammed bin Salman, and expects Saudi Arabia and Russia to cut oil output by as much as 10 million to 15 million barrels, as the two countries signaled willingness to make a deal
Trump did not specify barrels per day (bpd), but the market expresses demand and supply in those terms.
Saudi Arabia said it would call an emergency meeting of the Organization of the Petroleum Exporting Countries (OPEC), Saudi state media reported. The Wall Street Journal reported that the kingdom would consider dropping output to roughly 9 million bpd, or about 3 million bpd less than what it planned on pumping in April.
The crisis, made catastrophically worse by the coronavirus economic shutdown, began earlier in March:
- Russia rejected a proposal by OPEC to cut 1.5 million barrels per day of production.
- In response, Saudi Arabia not only cut its forward crude price to Chinese customers by as much as $6 or $7 per barrel, but is also reportedly looking to raise its daily crude output by as many as 2 million barrels.
- The move by the Saudis is both a market share grab and a loud signal to Moscow that it’s done playing games.
- American oil and gas workers and investors are caught in the middle of this epic ego battle.
Putin responded on Friday to signal his willingness to deal:
Russian President Vladimir Putin said his country is prepared to take part in deep cuts in oil production together with Saudi Arabia and other major producers to halt the slide in prices, echoing an announcement by his U.S. counterpart Donald Trump.
“We are ready to reach terms with partners within the framework of OPEC+ and are ready to cooperate with the United States on this issue,” Putin said on Friday during a video conference with top government officials and oil executives. “I believe that it is necessary to combine efforts in order to balance the market and reduce output.”
Russia sees a reduction in global oil production of about 10 million barrels a day as possible, and is ready to participate in this “on a partnership” basis, Putin said.
These meetings and deals became necessary as demand for petroleum dropped starting at the beginning of the year. Currently, the world produces around 104 million barrels of oil per day, but consumer demand tops out at 86 million barrels. Texas Railroad Commissioner Ryan Sitton, who oversees the state’s oil production, broke it down in a video yesterday:
The entire hour-long video is worth your time, but two graphs from the presentation are very important:
The first graph, demand vs. supply, is pretty straightforward. Supply has matched demand for 40 years, until 2020. This year, demand has dropped off a cliff. Jet fuel and personal transportation demands have dropped just this month, causing most of the oversupply as we all shelter in place. Demand for jet fuel has dropped by 70%.
The second graph shows demand projections based on how long widespread shelter-in-place orders may last. As you can see, the effects on the global petroleum market will not abate any time soon, even in the most optimistic of projections. Production simply cannot continue at the current rate.
How would a collapse in energy markets affect the U.S. economy? It could devastate individual states reliant on energy jobs for tax revenue to fund their budgets. It could cause mass layoffs if any more oil companies go out of business. Already this week, we’ve seen one shale oil company, Whiting Oil, file for bankruptcy:
Wednesday’s Chapter 11 bankruptcy filing for Colorado-based Whiting Petroleum is a grim omen of things to come, experts say, as oil prices face historic collapse amid the coronavirus crisis and the Saudi-Russia oil price war.
The company is the first U.S. shale producer to go under since the start of the year, when oil prices began to fall.
“I don’t want to be a doomsayer, but I think Whiting is just simply the first domino that’s going to fall,” John Driscoll, chief strategist at JTD Energy Services, told CNBC’s Capital Connection on Thursday. “It’s a fairly substantial company, but the smaller producers, if they don’t have the hedging in place, it’s going to be a tough route — Chapter 11 might be the only way to go.”
Shale has allowed the U.S. to become a net oil exporter, causing an economic boom in the industry. However, it’s the most expensive means of producing petroleum, so it’s especially susceptible to shocks to the industry. An industry collapse would greatly magnify the economic contraction already emerging from our response to the coronavirus pandemic, and the underlying weaknesses in the banking industry.
E&E News reported yesterday:
Several industry sources said the Department of Energy is expected to finalize a plan that would lease portions of the Strategic Petroleum Reserve to the private sector, taking crude off the market. DOE was seeking final approval for the move, which could account for 75 million barrels of oil.
Treasury Secretary Steven Mnuchin told CNBC yesterday that the administration would continue to ask Congress for approval to buy oil from U.S. producers to fill up the SPR. The administration failed to get the $3 billion provision in the third stimulus bill. And Mnuchin noted that Trump had calls with both Russia and Saudi Arabia to convince them to slow the tide of oil.
“The president is absolutely determined to protect our energy independence and our ability to continue in this industry, which is a very important industry for our workers,” he said.
Two industry groups, including one that represents the refiners, told Trump in a letter yesterday they oppose several of the proposed fixes.
“Imposing supply constraints, such as quotas, tariffs, or bans on foreign crude oil would exacerbate this already difficult situation, jeopardize the short and long-term competitiveness of our refining sector world-wide, and could jeopardize the benefits Americans experience as a result of our increasing energy dominance,” the presidents of the American Fuel & Petrochemical Manufacturers and the American Petroleum Institute said.
The letter noted that many refineries have announced reductions in output of 25% or more as demand for gasoline has dropped as Americans stay home.
“Right now our sectors are facing headwinds that should not be made worse,” they wrote. “Ultimately, it is demand recovery that will help the upstream, midstream, and downstream American oil industry.”
The hope is that this meeting, along with negotiations with Russia and OPEC+, will soften the economic blow by reducing production and stabilizing prices. It remains clear, however, that the economic shock of the pandemic response has only just begun.
Jeff Reynolds is the author of the book, “Behind the Curtain: Inside the Network of Progressive Billionaires and Their Campaign to Undermine Democracy,” available now at www.WhoOwnsTheDems.com. Jeff hosts a podcast at anchor.fm/BehindTheCurtain. You can follow him on Twitter @ChargerJeff.