Oil markets ready for back-to-back meetings on cutting output in flooded market

A group of oil exporting nations that encompasses OPEC and a Russia-led group of non-OPEC members will meet Thursday, April 9. But one of the most important players in the market now –  the United States – will be there only as the elephant in the room.

The virtual meeting of the OPEC+ group will be followed by a gathering of energy ministers (or in the case of the U.S., the Secretary of Energy) from the G-20 nations, also in a virtual hookup, to discuss the possibility of coordinated cuts in the oil supply to stabilize the oil market. After gains on Wednesday, the price of WTI crude on the CME stood at $25.09/barrel, down 60.2% from its January 3 high for 2020 of $63.27/b. For ultra low sulfur diesel, it settled Wednesday at $1.0107, down 50.9% from its early high for the year. 

The U.S. is part of the G-20. So are Russia and Saudi Arabia, who will be fresh off the Thursday meeting. Canada, another key exporting nation, also is a member of the G-20.

Oil markets have mostly moved higher this week on reports that Russia and Saudi Arabia have been moving toward an agreement, patching together differences that led last month to a collapsed OPEC+ arrangement to keep production in check. That deal fell apart just as COVID-19 was starting its rampage, slicing anywhere from 30 million to 35 million barrels/day (b/d) off the demand side of the oil market, coming from a base of about 100 million b/d.

The latest indications were that Saudi Arabia and Russia were working toward a deal that would see Russia cut about 1.6 million b/d off its current output of about 11.4 million b/d. Saudi crude output in February was 10.15 million b/d, according to S&P Global Platts, a jump of about 400,000 b/d from the month before after having launched its price war with Russia and to a secondary degree, the U.S. shale industry. 

For the U.S. energy sector, and for the trucking and transportation industry that serves it, the issue is that any effort by the U.S. to participate in a coordinated output in reduction goes against everything the U.S. has stood for. It may be illegal under antitrust laws; the U.S. still imports crude from around the world, even as it has been a net exporter of all petroleum products for several months; and the underlying U.S. policy toward oil has been the cheaper, the better.

But that was before the U.S. petroleum sector exploded, creating thousands of jobs, shifting petrochemical plant production to the U.S. and giving the country an extra arrow – or more – in its quiver to implement foreign policy steps, such as embargoes against Venezuela and Iran. With the U.S. producing so much more oil, the supplies of countries seen by the U.S. as rogue were not as necessary.

It is therefore problematic how the U.S. could cut its production in sympathy with other nations that through the OPEC+ meeting or the G-20 ministers meeting might take such steps. 

The focus might be shifted then to the issue of the U.S. contributing to cuts through a bleak outlook for a U.S. industry battered by low prices.

The weekly Energy Information Administration (EIA) report released Wednesday showed U.S. crude output down to 12.4 million b/d. That was a drop of 600,000 b/d from the prior week. It appears to be the largest one-week drop in the history of the data series from the EIA (excluding hurricane-related shutdowns). 

On the other hand, it takes production all the way back to just last September, so offering that up as an in-kind contribution to any sort of coordinated cut is not likely to impress other nations.

The U.S. rig count used to be a fairly reliable barometer of where oil markets might be heading. But the relationship between production and the rig count has been breaking down for a positive reason: drillers continue to find new efficiencies in their drilling operations. For example, the EIA’s Drilling Productivity Report recorded an average output per well in March of 842 b/d. A year ago, it was 664 b/d.

Source: EIA Drilling Productivity Report

That’s why if the U.S. points to its declining rig count, it is not likely to make much of an impact. The total U.S. rig count, according to Baker Hughes, stood at 664 last week. That was down 64 from the prior week. It was down 361 from a year ago. And yet production is higher. 

U.S. participants in the Friday call may point to sharply lower capital expenditures planned by the nation’s oil companies. ExxonMobil announced this week that it was cutting its capital expenditures budget by 30%. Chevron’s cut is 20%. Marathon Oil is going to be down about 50% in capital expenditures. Many of those cuts are being made in the nation’s shale plays. The argument could be that with those sorts of cuts, production in the U.S. can’t help but decline. 

What is that reduction in spending going to mean  for the future of U.S. output? If the U.S. wants to argue that it can contribute to a reduction in output without any government action, it can point to the latest Short Term Energy Outlook (STEO) released this week by the EIA. This month’s STEO was the first that had a full month of oil market chaos built into its models.

The STEO estimates U.S. crude production peaked at 12.87 million b/d last November. It sees output of 12.39 million b/d in April, a drop of almost 500,000 b/d. And as capex cuts take hold and the drilling level slows, the STEO sees U.S. output down to 10.91 million b/d by March of next year, for a drop of about 1.4 million b/d from April and almost 2 million b/d from the peak of last November.

And all of this without the U.S. government lifting a finger. There have been certain steps floated in which the government could step in. Texas and Oklahoma do have state authority to reduce output in a market-stabilization move but will likely encounter fierce resistance. There had been some suggestion that the U.S. could order a halt to production on federal lands, particularly in the Gulf of Mexico. But those wells are not like shale reserves and a total shutdown can have a significant negative impact on reservoir quality. When they get turned on again, what’s coming out is not what came out before. 

The U.S. railed against OPEC for years. Now it badly wants it to take steps to boost prices. The next two days will see if the American “contribution” to that effort has any impact on getting other producers to reach some sort of deal.