The GERM Report

-The free market is working.

-Eni says this is the most complex moment in 70 years.

A do-nothing approach to the oil economy is impacting supply dynamics in a way that no artificial mechanism can. After cutting production earlier this month, Bakken producer Continental Resources is halting drilling operations in North Dakota. Italian major Eni stated Friday it was trimming its production guidance by about 10%. With the glut building in the United States, Canadian heavy crude oil is essentially landlocked. Barring the trade anomaly that pushed US crude oil prices into negative territory, the oil market has shown some signs of life. And an extraordinary agreement among parties to the OPEC+ arrangement has little to do with it.

Brent crude oil is on pace for three straight days of gains, with the global benchmark trading up some 2.9% as of 8 a.m. ET to $21.95 per barrel. Prices were supported early Thursday by an uptick in US-Iranian aggression and market pressures on oil companies are carrying the momentum forward.

As I’ve speculated about the possibilities in recent conversations with colleagues, US operators are considering the demand destruction caused by global quarantines in response to the novel coronavirus an act-of-god situation. A spokesperson for Continental Resources told Bloomberg News that “this pandemic has brought about conditions under which force majeure applies.” The company has now halted most of its operations, after taking voluntary action to trim output amid the glut. The company was producing around 150,000 bpd in the Bakken shale at the start of the year, though market factors are responsible for some 300,000 bpd in lost production in North Dakota. Harold Hamm, the mogul behind the company, had been a staunch supporter of heavy government intervention to save the US oil industry, though it seems the adage that low oil prices are the solution to low oil prices is proving to be true.

Writing in The Houston Chronicle early this week, Lee Tillman, the head of Marathon Oil and an opponent of the artificial restraint movement in the Texas oil patch, argued that free market principles were the best way out of this.

“It is the engine for innovation and entrepreneurship and is responsible for creating the U.S. energy renaissance we all now enjoy,” he wrote.

In Darwinian fashion, the free market has already taken at least one American casualty; Whiting Petroleum. Tillman before the Texas Railroad Commission argued against a tyranny of the minority of sorts, saying artificial intervention would favor the less-efficient players struggling to survive. That echoes the sentiment from British-American entrepreneur John McAfee who said there are always losers in the system.

“In the free market, these losers are expected and encouraged to retrain and find new ways to survive and thrive,” he said.

The let-the-market-work stance was in part behind Russia’s reluctance to formalize deeper cuts, saying the market would rebound with or without state-driven restraint. And with less than a week to go before the 9.7 million bpd agreement from OPEC+ goes into force, Russia is taking a cautionary approach by keeping output steady so far in April. Italian major Eni announced Friday it was trimming its production guidance from around 1.9 million barrels of oil equivalent per day in 2019 to between 1.75 million and 1.8 million boe per day. Commenting on the state of affairs, CEO Claudio Descalzi said “the period since March has been the most complex period the global economy has seen for more than 70 years.” And in Canada, national oil production could decline by some 20% because of the damage done to Western Canadian Select, the country’s benchmark price for crude.

Stein’s Law dictates that if something can’t go on forever, it won’t. That holds for the coronavirus and the subsequent economic pain. In a webinar on Tuesday, Energy Intelligence forecast a $40 price point for Brent crude oil in third quarter and closer to $60 per barrel for next year. The Central Bank of Russia on Friday predicted a similar rebound, with the benchmark Urals moving from $27 per barrel this year to $45 per barrel by 2022. But the temptation to intervene during a protracted crisis like this may be overwhelming. US Treasury Secretary Steven Mnuchin said there could be a government lending program for distressed oil companies. Among the considerations is an equity stake in those companies in exchange for loans, something that is tantamount to indirect government control.