Trump’s Big Oil Deal Hinges on Weakest of Shale Going Bust
Stephen Cunningham Bloomberg April 13, 2020
(Bloomberg) -- President Donald Trump said the “big Oil Deal” he brokered will save hundreds of thousands of American jobs. But the agreement hinges on a shale bust that could spell the end for some explorers drowning in debt, bringing a wave of bankruptcies and job losses.
On Sunday, the OPEC+ group agreed to pare production by 9.7 million barrels a day, ending a devastating price war between Saudi Arabia and Russia. Trump, meanwhile, is counting on market forces to shave some 2 million barrels a day of overall U.S. output by the end of the year.
U.S.-focused oil producers have already slashed more than $27 billion from drilling budgets this year and are starting to shut in production. And almost 40% of oil and natural gas producers face insolvency within the year if crude prices remain near $30 a barrel, according to a survey by the Federal Reserve Bank of Kansas City.
“Trump’s strategy seems to rely on the free market forcing production down and implicit in that is some companies going under,” said Dan Eberhart, a Trump donor and chief executive of drilling services company Canary Drilling Services.
Explorers idled 10% of the U.S. oil-drilling fleet, with more than half of the losses in the Permian Basin of West Texas and New Mexico, the heart of America’s shale industry, while Concho Resources Inc. said that it and other producers are shutting in output. Oil producer Whiting Petroleum Corp. and service provider Hornbeck Offshore Services Inc. headed for bankruptcy.
The deal, reached after days of urgent negotiations, ended a standoff between Saudi Arabia and Russia and belatedly tackled a plunge in demand caused by the coronavirus outbreak. The lockdowns enacted across much of the world to slow its spread have caused consumption to crater by as much as 35 million barrels a day.
After the deal, Goldman Sachs Group Inc. analysts called the deal “too little, too late”, and said they expect inland U.S. crude prices to decline further in coming weeks as storage fills up. Prices fell below $10 a barrel in some areas of the U.S. during March due to the collapse in demand, with at least one grade bid at negative prices.
Oil futures in New York were up 3.2% to $23.48 a barrel Monday, but well off their initial surge following the deal.
Scott Sheffield, chief executive officer of shale driller Pioneer Natural Resources Co., said he’ll testify at a meeting of Texas regulators on Tuesday to argue for a 20% cut to the state’s oil production in May. The OPEC+ deal to lower output is “not enough” and more is needed from non-OPEC nations including the U.S. to stabilize crude prices, Sheffield said in an interview with Bloomberg Television. Texas should tie cuts to more reductions from G-20 nations, he said.
Oil giants Exxon Mobil Corp. and Chevron Corp., along with most of the other prominent Texas shale explorers, oppose mandated cuts.
Meanwhile, refiners, running out of places to store fuel they can’t sell, are cutting back production and turning away crude they don’t need, adding to pressure on smaller producers.
Scaling Back
Trump’s strategy in pressing the Saudis and Russians to agree to sweeping cuts hinged on his oft-repeated claim that U.S. drillers were already scaling back of their own accord in response to the downturn. Some senators from oil-producing states previously raised the prospect of cutting off aid to Saudi Arabia or slapping tariffs on its crude if the kingdom didn’t pare output.
Trump has pointed out that the oil could be pumped later. “Well, there’s no real cost because we’re agreeing to produce a little bit less,” he said at a press conference Friday. “It’s staying in the ground. You have it. You have it for another day.”
Two of the biggest industry trade groups, which opposed the idea of tariffs, expressed support for the deal. The American Petroleum Institute welcomed the “announcement of an agreement by other producing nations to follow the lead of the global marketplace – and U.S. producers – to reduce supply to align with lower energy demand as result of the pandemic.” The American Fuel & Petrochemical Manufacturers was pleased that a deal was reached that “helps U.S. producers and avoids imposing added costs on U.S. refiners.”
With demand destruction outstripping the pledged cuts by a long way, the agreement isn’t so much about balancing markets so much as buying time to prevent stockpiles from overflowing, said Kevin Book, managing director at ClearView Energy Partners LLC in Washington.
Russia hails oil deal it says will save millions of U.S.jobs
IF RUSSIA LIKES IT YOU KNOW ITS BAD FOR AMERICA
FILE PHOTO: Kirill Dmitriev, chief executive of the Russian Direct Investment Fund, attends a session of the St. Petersburg International Economic Forum
By Katya Golubkova and Olesya Astakhova Reuters April 13, 2020
MOSCOW (Reuters) - The global oil production deal clinched at the weekend will help establish a price floor and save millions of jobs in the United States, senior Russian officials said on Monday.
Having been in a stand-off with western nations - most notably the United States - from 2014 on everything from Crimea's annexation from Ukraine to allegations of election meddling, Moscow has sought to rebuild ties since the coronavirus outbreak.
It sent medical support to Italy and the United States to fight the pandemic and has supported the historic oil supply pact, which could have negative implications for its own economy.
The planned supply cuts represent a complete reversal by Russia and Saudi Arabia, which had both threatened to ramp up output in a battle for market share after the previous deal between the Organization of the Petroleum Exporting Countries (OPEC) and other producers fell apart in early March.
Combined with G20 input, the leaders of Russia, the United States and Saudi Arabia engaged in a series of phone calls last week to help to iron out the deal that could remove as much as 20 million barrels per day (bpd) of oil from the market - roughly a quarter of all supplies.
"(Russia's) President (Vladimir) Putin had as many calls with (U.S.) President (Donald) Trump last week as he had for the whole of last year," Kirill Dmitriev, head of Russia's sovereign wealth fund RDIF, told CNBC on Monday.
Trump has said he helped to broker the deal. The United States also agreed to make extra cuts on behalf of Mexico, helping to save the accord after four days of talks.
Russian Energy Minister Alexander Novak, speaking to Russian Rossiya-1 TV station, also praised Putin, saying that total output cuts were seen at between 15 and 20 million bpd, including by the United States, Norway and Canada.
He also said he had met heads of domestic oil producers, who had supported the deal.
'WORKING TOGETHER'
Dmitriev, one of Moscow's top negotiators, and whose fund shared the cost of Russia's medical help for Washington, believes that the oil deal would help to save more than 2 million U.S. jobs, he told CNBC.
"This is an example of us working together for the best of our nations," Dmitriev said.
Without the deal, oil prices might have collapsed to less than $10 a barrel from more than $30 now, he added.
Kremlin spokesman Dmitry Peskov on Monday described the deal as important and that it would help to keep oil prices from collapsing.
Russian oil output has already started to decline, falling to 11.24 million bpd this month, from 11.29 million bpd in March, an oil industry source said.
Moscow's obligations under the deal are to cut its output to 8.5 million bpd from May to June, bringing it to the lowest level since 2003.
The resulting economic impact could be as much as 1.2 percentage points from Russia's gross domestic product, said Kirill Tremasov, head of investment research at Loko-Invest.
Producers will slowly relax curbs after June, though production reductions will remain in place until April 2022 under the terms of the deal.
(Additional reporting by Dmitry Zhdannikov in London; Darya Korsunskaya, Elena Fabrichnaya, Tom Balmforth, Maxim Rodionov, Maria Kiselyova and Vladimir Soldatkin in Moscow; Writing by Katya Golubkova; Editing by David Goodman and Catherine Evans)
Don Lee LA Times April 13, 2020
An oil rig and pump jack work in Midland, Texas, the nation's top oil-producing state. (Jacob Ford / Odessa American)
The agreement announced Sunday by Russia, Saudi Arabia and other oil-producing countries to cut back output is unlikely to raise fuel prices much for American consumers in the weeks and months ahead.
That should be good news for the American economy and for President Trump. But these are not normal times.
The coronavirus pandemic has created a painful bind for Trump and for the United States: Plunging oil prices, coupled with a huge glut in global oil inventories, are savaging the petroleum industry at a time when the U.S. has become the world’s largest oil producer.
Long before he was elected president and continuing after he entered the White House, Trump lambasted attempts by OPEC, the oil cartel, to prop up petroleum prices by limiting production.
That’s been a politically rewarding stance because lower oil prices are the equivalent of a tax cut for drivers, homeowners and many businesses: They put more spending money in people’s pockets and generate goodwill toward leaders who take the credit.
That has generally been true even if the decline hurt the U.S. oil industry.
But not so in the age of COVID-19. State and local governments have ordered lockdowns, stay-home orders and social distancing policies that experts say are necessary to reduce the pandemic’s toll.
“This is a fairly new situation,” said Antoine Rostand, president of Kayrros, an energy research and consulting firm. “Those who could enjoy low prices are stuck at home,” he said, and U.S. oil producers are suffering the downside of depressed prices.
Gasoline prices are certainly falling. The national average for regular gas dropped to $1.92 per gallon in the week ending April 6, below $2 for the first time in more than four years and down 50 cents from just a month earlier. It's dropped a similar amount in California to $2.87 a gallon.
Experts see fuel prices sliding further, possibly to record lows on an inflation-adjusted basis.
The new agreement to lower oil production is unlikely to have much effect at a time when the world is already awash in surplus oil and most major economies, including the U.S., are plunging into recession.
Analysts say the cutback, unprecedented as it was, is too little and too late.
The agreement by 23 oil-producing countries pledges to remove 9.7 million barrels of oil a day from world markets. But amid the pandemic, global demand for oil has fallen by at least 20 million barrels, some say as much as 30 million, a day.
Moreover, it’s not enough to erase the existing glut in oil inventories around the world anytime soon.
“Every available pipeline and storage terminal is about to be completely full, so you have to stop production or you've got to pay someone to take your production away,” said Bobby Tudor, chairman of Tudor, Pickering, Holt & Co., an investment banking firm based in Houston, the nation’s oil capital.
“If 16% of oil demand is people just driving to and from work globally, how quickly does that come back?” he asked. “How quickly will we all be willing to get back on an airplane?”
For Trump, the new reality has meant flip-flopping on his long-standing aversion to deals to reduce oil output.
Before the 2018 midterm elections, when the price of gasoline was rising to nearly $3 per gallon, Trump jawboned Saudi Arabia to boost its production to get prices down.
As recently as March 9, days before the spreading coronavirus drove Trump to embrace social distancing restrictions, he cheered a silver lining in the one-two punch of the pandemic and the Russia-Saudi price war.
“Good for the consumer, gasoline prices coming down,” the president tweeted.
But just two weeks later Trump tweeted that “Our great Oil & Gas industry” is under siege. And since then the president has reached out to Russia while U.S. lawmakers have pressured Saudi Arabia in no uncertain terms to halt their disastrous battle for market share.
Trump's about-face comes as U.S. producers are indeed under siege.
Texas, North Dakota, Oklahoma, New Mexico and other oil-producing states are feeling the first waves of shutdowns and company bankruptcies. That is further aggravating the overall plunge in employment and economic activity nationwide.
Tudor said he is already seeing significant layoffs at Houston’s oil firms and spillover to ancillary businesses.
“A collapse to this industry would be a really bad thing ultimately, not just for Houston but for the broader economy in the country,” he said.
In the last month, there’s been a 50% reduction of crews working in America’s shale oil basins, according to an analysis of satellite images and other calculations by Kayrros.
“That’s really unprecedented,” said Kayrros’ Rostand. “It really reflects the reality on the ground: that there’s a very dramatic imbalance between supply and demand.”
Things have gotten so worrisome in Texas, by far the nation's leading oil producer, that state authorities are considering imposing production caps for the first time in a century.
In the face of falling demand and the existing supply glut, the new cutback agreement is not nearly large enough to reverse the situation anytime soon.
At the end of 2015, the world had 593 million barrels of surplus oil inventory. And with the global economy growing about 3.5%, it still took two years to work off the supplies, said Amy Myers Jaffe, senior fellow for energy and the environment at the Council on Foreign Relations.
The cutback deal Sunday may avert what Jaffe called a worst-case scenario in which oil stockpiles would fill up well above 2015 levels at a time when the world economy is in recession.
Still, she said, “Oil prices are bound to stay low.”
Certainly, the mismatch between supply and demand was exacerbated by the price war between Russia and Saudi Arabia, two of the biggest oil producers. They sought to gobble up a larger share of the oil market by producing more and swallowing the resulting price declines.
The combination of the coronavirus and the Saudi-Russia feud saw the U.S. benchmark price of crude tumble from more than $61 a barrel at the start of the year to a low of $19.27 on March 30. Despite the agreement, it was down 1.5% on Monday to $22.41 a barrel.
That price is barely half of the break-even level for many producers in the United States, and so companies have begun to reduce the flow.
Giant oil firms, such as Chevron and Exxon, are in relatively good financial shape to weather the downturn. In addition to size, those producing shale oil will be better off. Shale beds can be turned off and on with less risk of damage compared with conventional wells.
A lot of smaller and independent drillers, however, could fold or be eaten up by larger firms. And this time, investors won’t be running back to the oil industry to supply capital as in the past. Not only have they been repeatedly burned by disappointing performance, now they see a very uncertain outlook.
As both the biggest producer and the biggest user of oil, accounting for about 20% of the 100 million barrels a day consumed worldwide, the U.S. is taking hits on both sides of the equation.
Daniel Yergin, the energy expert who is vice chairman of IHS Markit, a research and consulting firm, wrote recently that U.S. production could drop by almost 3 million barrels per day by year's end. That could knock the U.S. below the Saudis and Russians as the top producer. It could also mean rising oil imports.
“The economic costs will be high, given the importance of the shale revolution to the overall U.S. economy — accounting altogether, according to analysis by IHS Markit, for about 2.5 million jobs,” Yergin said in an article in Foreign Affairs.
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