Oil Price War 3: My AlJazeera spot on negative price, Putin’s rout, shale, and Trump’s dilemma: independents v big oil

The 24.04 video: Aljazeera asked me about negative prices and we got into storage, Putin’s huge blunder in launching the price war, the fate of US shale, and the dilemma faced by Trump and the Texas Railway Commission on cutting US production: there’s no way to please both the independent US producers and the big US international oil companies.  One or the other is going will be very upset. (Note: English audio record replaces original Arabic here. Thanks to AlJazeera for the clip.)

Facing urgent oil-cut decision, Trump & Texas Railway Commission dither

Let me expand a bit on this point I made at the end of the interview: Trump is dithering as the day of reckoning approaches – the day when US oil’s physical storage is full.  Then it won’t be just the WTI Nymex futures price going negative overnight, the physical, spot market would go negative and freeze up.

So, either Trump has to invoke national security and use federal powers to order proportional, across-the-board cuts nationally, or the Texas Railway Commission and its

analogues in Oklahoma, Colorado, New Mexico, North Dakota et al have to impose similar percentage-output cuts on a state-by-state basis, if the entire US oil industry is to shares the pain of production cuts equally, across the board.  In a 10-hour-long extraordinary public hearing on 14 April by the Texas Railway Commission, and followup meetings, the Commission has clearly kicked the can down the road, avoiding any decision. 

If either the federal or states level is going to do this, it is best they start right now, (and even better a few weeks ago) or cuts will be done anyway by negative market prices, but chaotically, and at the last minute. No one wants to make big cuts, shutting in wells, and then find our their competitor didn’t cut, or didn’t cut as much.

Last minute, and non-proportional cuts would maximize the damage to physical wells and also disadvantage the smaller-and-medium-sized independent frackers’ businesses (and to their employees jobs) and in particular the higher cost and more highly indebted of these producers.

This, in turn, would greatly advantage the biggest firms, including the majors, i.e., the International Oil Companies (IOCs) and some of the larger independents. Although these will suffer big cuts to profits and possibly worse, many of will weather the coming period and end up buying up bankrupted independents and, eventually, running these fields profitably when the COVID economic crisis is finally over and demand returns.

The IOC’s – represented traditionally by the American Petroleum Institute (API) – absolutely do not want any “prorationaing”, as government control of oil production is called. In other words, setting a percentage of the full capacity at which any and all oil wells could be pumped.

Aside: The API’s CEO, Mike Sommers, made clear to Trump at a White House oil-executive meeting the oil majors’ opposition to any prorationing.

So too, the majors also do not want any import tariffs; while the independent producer generally support tariffs in order to limit foreign imports and keep the price of oil artificially elevated inside the USA, above the global price. But, the oil majors have their oil holdings mostly overseas and do not want this.

Trump can’t possibly please both these two sections of the US oil sector, which have up till recently both been firmly supportive of his presidency; nor can the Texas Railway Commission,  If they take one side, the other will seek political revenge.

Aside: For the voice of the independents, I recommend the Daily Brief Podcast by WorldOil.com.   A survey of US oil firms conducted by WorldOil.com confirms this split in the two sections of the US oil sector as to what actions the federal and state authorities should take – a split with roots going back decades.  Here is the Part One report from the WorldOil.com survey, Part Two, Part Three and Part Four.

So, just as Trump did when the intelligence services told him that COVID-19 was coming back in early-to-mid-January … instead of decisive and competent action, he dithers and blusters.  Like the virus, the deep oil cuts and ultra-low-for-longer oil prices will surely come; no one can stop this reality.  But, like with the health crisis, concerted and competent government action can greatly mitigate the impact.

So far, both Mr. Putin, nor Mr. Trump have performed miserably on both the COVID-health or COVID-oil crisis fronts, to the detriment of both the Russian and American people. Mr. Putin has much less strategic “depth” economically, financially and in science and technology to fall back on than does Mr. Trump, where the latter does not, after all, have “unlimited power” as he recently claimed he does.

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