-Exxon cuts spending. Continental cuts production.
-US oil sector continues to take a beating.
Close to a dozen oil producing nations have been invited to a virtual town hall of sorts to discuss how to address the evaporation of global demand. The collapse of OPEC+ restraint and the closure of major segments of the world’s economy has cut the price of Brent in half so far this year, wiping jobs and capital expenditures off the map. Kirill Dmitriev, the head of Russia’s sovereign wealth fund, told CNBC that a solution of sorts is “very very close,” though what that deal will look like is anyone’s guess. By some estimates, some 30 million barrels per day in demand are gone due to economic closures from the coronavirus pandemic. Nobody is doing well at these prices, yet the brunt of the pain seems to be in the United States.
Brent crude oil was up 1.5% as of 8 a.m. ET to trade at $33.54 per barrel. The global benchmark is already up a whopping 49% for April amid rumors of voluntary production restraint, but is nowhere near the peak for the year. Neither is the April bull run enough to incentivize companies to spend their way out of this.
Exxon Mobil announced Tuesday it was trimming capital investments for the year by $10 billion to about $23 billion.
“After a thorough evaluation of the impacts of the pandemic and market conditions, we have worked closely with business partners to plan and execute capital adjustments that preserve long term value, maximize cost efficiency, and put us in the strongest position when market conditions improve,” Chairman and CEO Darren Woods said in a statement.
Woods was at a roundtable discussion on US energy issues at the White House during the weekend. Corporate and US political leaders thanked President Trump for the stimulus efforts meant to prop up an economy hammered by the viral pandemic. There was no mention during the meeting of the war waged between Russia and Saudi Arabia over market share. Instead, US lawmakers suggested it was time to punish Riyadh for the damage done to the US shale sector. The damage has already been severe.
The United States has been invited to a meeting of global oil producers on Thursday, but there is no indication yet that representatives will attend. With Brent down some 50% from its peak this year, even the most efficient producers can agree that something needs to be done. The rumor mill suggests that Saudi Arabia is ready to sign a truce with Russia to end the price war, and the market is starting to react. Coordinating across several dozen producers, however, may be difficult. Kenneth Waltz, a pioneer in the study of international relations, has said that “parties engaged in cooperative endeavors must look for a common denominator – they risk finding the lowest one and easily end up in the worst of all possible worlds.”
“The worst of all possible worlds” is how nationalist leaders such as Trump and Brazil’s Jair Bolsonaro see globalization. Management fatigue has, by their read, left domestic issues ignored to the detriment of national strength. There is, however, only so much that can be done for an economic sector like oil, which, like it or not, is a globalized commodity. Due to circumstances beyond its control, Exxon joined a long list of companies slashing their budgets. And most of the spending cuts, the supermajor said, will come from the Permian basin, the beacon of the US shale industry. That is not a move to embolden national strength. And Exxon is not alone. Continental Resources, the darling of North Dakota shale, said Tuesday it had no option but to cut production.
“Global crude oil and product demand [are] estimated to have been impacted by 30% due to COVID-19,” CEO Bill Berry said in a statement. “Accordingly, we are reducing our production for April and May 2020 in a similar range.”
That helps stem the glut. But also shows the worst of all possible worlds for the US oil industry has come home to roost.