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, Oilprice reported.
One of those was Jay Young, 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 2 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. Growing U.S. oil production has frustrated the OPEC+ efforts to rebalance the market for the past 3 years. But the oil price crash is hurting the shale patch so much that companies are starting to cut budgets by 20-30 %.
Production will slow down inevitably, but the huge demand destruction, which is just beginning in the world’s top oil consumer, the U.S., 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 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, 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.”
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.
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.