-Trump no longer hates OPEC.
-Any OPEC cuts would come from already extraordinary heights.
Some 6.6 million Americans lost their jobs last week, though equities markets are showing a return to optimism amid early signs of a slow pandemic recovery. In the American oil sector, however, the pain is severe and enduring, with investments receding from the Permian shale basin at a staggering pace. In its monthly forecast for April, the US Energy Information Administration reported that the United States is moving from an oil exporter to a net importer as the domestic energy sector collapses. Production this year could retreat for the first time since 2016 and stay low “as many producers have already announced plans to reduce capital spending and drilling levels,” it reported. Elsewhere, Riyadh and Moscow are debating baseline scenarios for coordinated action, while the G20 debates its own steps. The market needs a Goldilocks moment, but there may be too many chefs in the kitchen to get the porridge just right.
Brent crude oil was up 1.92% as of 8 a.m. ET to trade at $33.47 per barrel. Morning levels may be somewhat irrelevant, however, as traders hold their fire before a multilateral virtual meeting of OPEC and a handful of other players later on Thursday. For that matter, the market could be dancing to a different tune altogether when the G20 weighs in on Friday.
The EIA gave a gloomy assessment of the domestic oil market in its monthly report for April, giving a $33 per barrel forecast for Brent in 2020, some $10 per barrel lower than its forecast in March. While it usually takes six months or so for that depression to show up for producers, the COVID-19 demand destruction and the OPEC price war have already taken their toll. In sheer demand terms alone, the EIA in its weekly issuing reported petroleum products supplied, a proxy for demand, fell by 7 million barrels per day, which according to John Kemp, the Reuters market guru, is a collapse that has “no parallel in history.”
Already, global economic policymakers have pushed the stimulus accelerator to the floor to try to stem the bleeding. A similar approach is needed in the oil sector, as even major players like Russia are coming to terms with the economic collapse. After waging a war over market share in the wake of disagreements earlier this year, traders and investors now expect a handshake of sorts, not just from Saudi Arabia and Russia, but from other suppliers such as the UK, Canada and Norway. All parties are in agreement that coordinated action is needed, but how coordination would look among such a diverse group of state-directed and free-market directed producers is anyone’s guess.
Saudi Arabia, the de facto head of OPEC, has already proposed a cut, but from extraordinary levels in excess of 12 million bpd that would more or less put the kingdom back at its historic average. Russia too said it could take action. But in a sign of continued disagreements, Riyadh wants even more from its counterparts.
“You (Russia) should agree on a deeper reduction,” an OPEC source told the Russian news agency TASS on Thursday.
And in an unprecedented shift, there are calls in the US for government intervention of some sorts to support the oil sector rather than riding the storm out. The EIA forecast suggests it could be another 18 months or so before demand levels return to normal and we’ve already seen major hits to revenue streams in the first quarter. Exxon Mobil on Wednesday, however, joined its peers at Chevron and Occidental in a “stay out” message to the market.
The free market, Exxon said in a letter to Texas state regulators, is “the most efficient means of sorting out the extreme supply and demand imbalances we are now experiencing.”
US producers such as Continental Resources have already cut production, though that may be an artificial reaction to current market conditions rather than tacit OPEC alignment. Russia said those cuts won’t count toward the 10 million bpd necessary to support producers. It would therefore require an extraordinary shift in market thinking to get this many players on the same page. Drastic times call for drastic measures. Speaking to reporters during a regular briefing on Wednesday, US President Donald Trump suggested his perception of OPEC was evolving. He “hated” OPEC, he said, but his mind has changed.
“We have a tremendously powerful energy industry in this country and I don’t want to see those jobs go away,” he said.