HOUSTON – The American oil industry might avoid bullets.
Russia and Saudi Arabia – which only a month ago hoped to weaken American producers – have backed away from the threat to pump more oil into a saturated market. Admitting that the bet was hurting themselves, they announced it last week they tentatively agreed to cut production.
This change will certainly make room for American companies to gradually reduce production on their own terms, without a government or regulatory mandate, because they invest far less in exploration and production.
“Hopefully, the American oil industry avoids the worst scenario,” said Amy Myers Jaffe, energy expert and Middle East at the Council on Foreign Relations. “There will still be bankruptcy, but for now, fears that there will be wholesale industrial destruction can now be ruled out, because the worst price war has passed.”
What happened in the last few days can support an industry that directly and indirectly employs nearly 10 million Americans. U.S. production spike in recent years it has reduced dependence on foreign oil, and reduced prices at gas stations for consumers.
Uncertainty still exists for this industry. The virtual summit of oil-producing countries and the Group of 20 energy ministers on Thursday and Friday ended in ambiguity, when Mexico balked at agreements made by Russia and Saudi Arabia to collectively reduce production by 10 million barrels per day. But two power of oil apparently ready to give permission to Mexico, after President Trump made a vague promise that the United States would make cuts that were not done by its southern neighbors.
Members of the Saudi-led Organization of Petroleum Exporting Countries have held talks in hopes that the United States, Canada and other western producers will agree to explicit cuts, adding up to 4 million or 5 million barrels per day. In contrast, American officials only make guarantees that crude oil production will decrease over time, in addition to voluntary reductions that have begun in some U.S. companies.
The global oil industry still has many problems. The collapse of economic activity caused by coronaviruses has reduced demand by around 30 million to 35 million barrels per day, according to international energy agencies and oil consultants.
Analysts expect oil prices, which jumped above $ 100 a barrel just six years ago, to remain below $ 40 for the foreseeable future. The benchmark US oil price was just under $ 23 a barrel on Thursday.
But the fall in oil prices completely into single digits – something not seen in two decades – seems to have been avoided. President Trump’s recent public lobby in Russia and Saudi Arabia to reduce production helped raise the price of a few dollars per barrel, which allows many American companies to reduce their exposure to price reductions by hedging. By setting their selling prices at a higher level close to the break-even point for shale wells, they can limit their losses.
American oil companies have eliminated thousands of jobs, blocked old wells and deactivation rigs and fracking equipment in preparation for the worst decline in more than a generation. Oil-producing countries such as Texas, Oklahoma and North Dakota expect huge losses in employment and tax revenues.
Declining oil demand worldwide could cause US oil exports, which reached more than 3 million barrels per year last year, to dry out almost completely. Concerns about climate change will continue to disrupt the industry and scare investors.
But industry executives predict consolidation, where small companies in debt are bought either by large companies or mergers. The decline in production will come because the market conditions of supply and demand determine. American oil production has fallen by several thousand barrels per day over the past two months and will probably fall by 2 million barrels per day until the end of the year, according to the Department of Energy.
“There will be some companies that will not survive,” said Trent Latshaw, president of Latshaw Drilling, an oil service company active in Texas and Oklahoma. “But the industry in general will survive and come out of this stronger. We have to make difficult decisions, innovate, and we will be smarter because of this. “
This scenario is similar to the last time Saudi Arabia and OPEC allies flooded the market with oil in 2014 in an effort to cut out American shale producers who took market share from them. Prices fell and hundreds of American companies went out of business, and 170,000 jobs were lost. While American production fell briefly, it quickly recovered and grew.
Coronavirus is a new and bigger challenge for the industry, and the challenge was briefly magnified when Russia last month refused to join Saudi Arabia in cutting supplies. Russian oil executives say they are tired of losing market share to American producers. Saudi Arabia retaliated by promising to pour more oil into the market, taking a price of around $ 20 per barrel for a while, less than half the level at the beginning of the year.
The decision by Saudi Arabia to place an additional 3 million barrels per day on the market is a big bet that backfires, and there is a possibility that oil prices will sink again in the coming days if traders are not satisfied with the cuts announced by Saudi Arabia, Russia and alliance partners they. In fact, on Thursday, the last day of oil futures trading, prices fell sharply even though producers were close to reaching an agreement.
Behind all the windy wheels and the transaction, Saudi Arabia managed to bring Russia back producer alliance called OPEC +. But stunned by the size of falling prices, both Saudi Arabia and Russia need to reverse direction and cut supplies to prop up crude oil prices.
“There are miscalculations on both sides,” said Ben Cahill, a senior energy expert at the Center for Strategic and International Studies. “Russia miscalculated how sharply the Saudi response was and they might be surprised by how deep the price reduction was.”
“Saudi Arabia will have a large budget deficit, they must issue more debt, they must reduce their reserves, and the longer this cycle lasts, the more destructive it will be,” Mr Cahill added.
With a devastating economic pandemic around the world, several buyers are available in recent weeks to buy cheap Saudi crude. The kingdom stores some oil in Egypt and is forced to let unsold crude sit on tankers along its coast.
Increasing glut is a threat to the Saudi government’s finances. With a projected average price of $ 34 a barrel this year, Norwegian consultant Rystad Energy estimates that royal income will be 50 percent lower than in 2019, a loss of $ 105 billion.
Saudi Arabia still has foreign exchange reserves of $ 500 billion, but that number has shrunk from $ 740 billion in 2013. Several years of depressed oil prices forced the kingdom to borrow money and reduce energy subsidies for its citizens. Crown Prince Mohammed bin Salman now relies on his reserves to help diversify the Saudi economy for the future.
Russia is financially better than Saudi Arabia, especially with a flexible exchange rate – when the ruble depreciates, its export value rises. While it will also lose billions of dollars in revenue with a drop in oil prices, the government has a fiscal deficit that is far lower than Saudi Arabia and has $ 550 billion in foreign reserves.
But Russia has another obligation. It has limited processing capacity and refineries do not have adequate storage facilities. The company relies on long pipes to bring oil to buyers in Europe and Asia. But European demand has collapsed, and Russian storage tanks are quickly filling up. China still buys oil, at a low price, but its storage will be filled in about a month away, leaving stranded Russian crude.
With thousands of Soviet-era oil and gas wells in western Siberia, Russia will be faced with the prospect of closure and then return to the well, an expensive proposition, and in the process may permanently limit the amount of oil that can be recovered in the future. .
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