Right after Saudi Arabia-led OPEC and Russia broke up their pact to keep oil supply and prices in check, some in the U.S. oil industry were optimistic that oil prices would go back up to $65 by the end of the year regardless of the end of the production restrictions.
One of those was Jay R. Young, President and CEO of King Operating Corporation, an independent oil and gas operator in Texas, who argued in a post on Forbes that U.S. shale shouldn’t panic because prices would bounce back.
In just two weeks, the situation on the oil market has changed dramatically and prices for the U.S. benchmark are in the low $20s. Not only has the Saudi-Russian oil price war depressed prices, but the falling oil demand with coronavirus-caused country lockdowns is heavily weighing on the outlook for this year’s global oil demand. Analysts see 10 million barrels of oil (bpd) or more of lost demand and right now no one expects oil demand to grow this year compared to last year’s muted growth.
“[M]y prediction is oil will bounce back! And it won’t be because of the emotional reactions Saudi Arabia and Russia took last night, poking out their chests over production cuts. It will be because of basic supply and demand and a lot of people will be scratching their heads saying, ‘Why didn’t I invest in the oil markets when prices were low?’” Young said in his post.
Fewer rigs and falling well productivity rates across the U.S. shale patch would reduce U.S. oil production, thus leading to higher oil prices by the end of 2020, Young says. Related: What Happens If Oil Prices Go Negative?
Growing U.S. oil production has frustrated the OPEC+ efforts to rebalance the market for the past three years. But the oil price crash is hurting the shale patch so much that companies are starting to cut budgets by 20-30 percent.
Production will slow down inevitably, but the huge demand destruction, which is just beginning in the world’s top oil consumer, the United States, is set to continue depressing oil prices at least until the coronavirus pandemic is contained.
Faced with such unprecedented demand flop, oil producing countries face a lot of pain in what promises to be an oversupplied market for the next months. In the U.S., the oil industry will suffer, in Saudi Arabia and Russia, the government finances will be hit.
With demand falling off a cliff, oil at $65 by the end of the year would need millions of barrels per day taken off the market through another coordinated action among oil producers.
Saudi Arabia and Russia are currently not backing down from the oil price war, even though their finances will be hurt by oil prices much lower than their fiscal breakevens.
The question is, which oil producer will see this overproduction as a price too high.
The U.S. is also wading into the debate, with U.S. President Donald Trump saying last week that “at the appropriate time, I’ll get involved” in the Saudi Arabia-Russia oil price war.
Texas Railroad Commissioner Ryan Sitton spoke with OPEC’s Secretary General Mohammad Barkindo on Friday, and tweeted that “we all agree an international deal must get done to ensure economic stability as we recover from COVID-19. He was kind enough to invite me to the next OPEC meeting in June.” Related: Do Saudi Arabia And Russia Really Want To Kill U.S. Shale?
The chairman of the Texas Railroad Commission, however, is not in favor of capping production.
“A couple of operators have suggested pro-rationing oil as a solution. While I am open to any and all ideas to protect the Texas Miracle, as a free-market conservative I have a number of reservations about this approach,” RRC Chairman Wayne Christian said in a statement on Friday.
The U.S. also has other options to intervene in the Saudi-Russian feud, including by passing the NOPEC legislation which would remove the immunity of any oil producing nation to be sued under U.S. antitrust laws.
With oil demand expected to take a major hit in the coronavirus pandemic, oil price wars and a flood of oil supply from the former allies Saudi Arabia and Russia is the last thing oil bulls (if there are any left) need this year.
Oil at $65 currently looks as unachievable as $100 oil looked when oil prices were at $65 a barrel.
By Tsvetana Paraskova for Oilprice.com
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Of course, prices are going to face a huge glut which has grown to an estimated 4.8-6.0 million barrels a day (mbd). However, once the outbreak is controlled, the global economy particularly China’s will behave like somebody who has been starved of food while in quarantine. Once allowed to eat, his appetite will be rapacious and that will exactly be the same with the global oil demand which will probably double or perhaps triple its oil imports to compensate for lost demand. If this proves to be the case, we will then see a fast depletion of the glut and a quick rise of oil prices to a range of $63-$67.
The threat that President Trump may invoke NOPEC bill to stop the price war is an empty threat. In normal circumstances, Saudi-led OPEC would ignore it since OPEC is not a cartel and has never been a cartel throughout its history. It won’t stand scrutiny in a court of law. Moreover, the United States has been manipulating oil prices for years.
But we are not in normal times. OPEC has been weakened by the slide of oil prices and Saudi Arabia is being weakened by its senseless and unwinnable price war against Russia. So Saudi Arabia might just use the excuse of US pressure on it to save face and stop the price war.
Whatever the outcome, the US shale oil industry will end up as the biggest collateral casualty of this war.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
All the business news networks act as if we desire higher prices. WRONG!
We the consumers want gasoline to cost less than a buck. If you can't do that then die as an industry.
If prices for oil goes down our GDP will go up not down. And that's because we are a consumer driven economy and the more money in the hands of the people makes the entire economy brighter. Once we get past the CoronaVirus and the Oil Industry falls on its face we will as a nation and as a world recover quicker faster and stronger.