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Do Oil Market Fundamentals Justify $40 WTI?

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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Oil Giants Turn On Each Other As Crude Prices Plummet

Scott Sheffield of Pioneer Natural Resources blamed ExxonMobil for blocking help from the American government for the U.S. shale industry. Exxon’s refusal, Sheffield says, is because the oil major wants to kill smaller shale companies.  “It’s going to take a long time to balance the market. That’s why Pioneer and several independents are seeking a global settlement to look at really reducing production with all states, OPEC, OPEC+, until the virus has ended,” Sheffield said in an interview with CNBC on March 26. 

These discussions have taken various forms. The oil industry tried to ask for help, but missed out on specific handouts in the $2 trillion stimulus recently passed by the U.S. Congress. 

Meanwhile, one commissioner on the Texas Railroad Commission has proposed state-led production cuts from U.S. shale, so long as it was done in coordination with OPEC. Meanwhile, some U.S. senators are calling upon the U.S. government to put tariffs or even an embargo oil imported from Saudi Arabia, Russia and the rest of OPEC. Scott Sheffield’s Pioneer Natural Resources, along with Parsley Energy, formally requested a hearing from the Texas Railroad Commission on production rationing. 

On Monday, President Trump had a phone call with Russian President Vladimir Putin, where they apparently talked about the oil market and agreed to have their top energy officials follow up with another discussion.

Nothing concrete has materialized as of yet. 

Related: An Oilman’s Plea To President Trump

  The notion of a Texas/U.S. negotiation with OPEC and Russia on some sort of a global production cut faces enormous obstacles, not least of which is the benefit to Riyadh and Moscow of a shale industry going belly up. 

But in the CNBC interview, Sheffield saved his ire for the oil majors. “We’ve run into roadblocks. We’ve had opposition from Exxon, who controls API and TXOGA,” Sheffield said, referring to the American Petroleum Institute and the Texas Oil & Gas Association, two powerful industry lobby groups. “They prefer all the independents to go bankrupt and pick up the scraps.” 

He said others are also against some sort of agreed upon production cuts because they are in such a dire situation. “We have other companies like Marathon and Ovintiv who are opposed to it because they are so financially stressed they cannot event cut production because they’ll go bankrupt,” Sheffield added. 

Reacting to these statements, the CNBC host seemed taken aback, and asked Sheffield to clarify whether or not the oil majors were really going after small and medium-sized shale drillers. 

“Exactly,” Sheffield said. “That’s definitely what’s going on. And we have no solutions.” 

Sheffield appears to be on to something. Sources familiar with the matter told the Wall Street Journal that Chevron and ExxonMobil are indeed opposed to the Texas curtailment strategy. And the powerful API has come out against government help for shale. 

“We have 74 public independents. There’s only going to be about 10 left at the end of 2021 that have decent balance sheets. The rest will become ghosts or zombies.” 

The one problem with Exxon’s strategy, according to Sheffield, is that it might be difficult to buy up the zombies. “Consolidation won’t happen because too many companies have too much debt.” 

Related: Oil Markets Are On The Brink Of Armageddon

Sheffield remained optimistic that either Saudi Arabia or Russia would give in and come back to the table. “I believe one of them will blink…I don’t know if it will be 3 months, 6 months or 9 months. But something will happen.” 

However, the excessive focus on OPEC+, or potential rationed production in Texas, entirely misdiagnoses the problems with the oil market right now. The global surplus from overproduction is a fraction of the surplus resulting from the gaping hole in demand. The main story is the coronavirus pandemic, not the OPEC+ price war. 

“[T]he price war is for the moment a marginal effect in the face of the coronavirus-related demand shock,” Standard Chartered wrote in a note on March 31.

The bank sees global supply down 3.2 mb/d at the start of April, year-on-year, but demand down 18.5 mb/d. “The coronavirus is therefore responsible for 85% of the expanded oil surplus, and even if the price war were to be called off today, it would not affect the prognosis for the industry in Q2 greatly,” Standard Chartered said. 

A new estimate from IHS Markit predicts that a massive 10 mb/d of global supply will be shut in between April and June, which makes the theoretical state-led cuts in Texas look like a joke. Saudi Arabia and Russia are definitely feeling the pain of low prices, but if they wait a few more months, a volume of supply will go offline several times larger than what they may have cut on their own. 

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Brian Bresee on March 31 2020 said:
    Trump is very predictably from what he has done in his past trade wars, he will put the 'American' worker first. What that means is he will not let the US oil industry be destroyed by Russia and Saudi Arabia, he will take decisive action to prevent that from happening using his favorite tool, the tariff. Doing so will somewhat insulate US producers through the Coronavirus and Russia/Saudi oil war, making it even more painful for them to continue. Trump is a businessman first, not a foolish politician, he know what levers to pull. Expect that big announcement about a new production deal to come unexpected and soon, investors don't want to be on the wrong side of that.

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