President Trump on Friday announced a plan to buy 90 million barrels of oil to be stored in the government’s Strategic Petroleum Reserve, in a bid to prop up prices and confidence. But it’s unlikely to change the trajectory of a week’s worth of furious calculations by executives and analysts as they look at the year ahead.
It was only last week that the Saudis announced they would raise their output by several hundred thousand barrels a day, sending the price crashing for most of this week before showing signs of life Friday.
U.S. oil producers — slow to move when the Saudis launched an earlier price war five years ago, uncertain of the Saudi commitment — showed no such hesitation this week.
On Monday, Claudio Galimberti, an analyst with S&P Global Platts, predicted that “March and April demand would be brutally curtailed.” In a worst-case scenario, the firm said, there could be a 950,000 barrel-a-day decrease in global demand. By Friday, Goldman Sachs was predicting that, in any scenario, the falloff in American production alone would be a million barrels.
In between those predictions, a Goldman Sachs study released Friday showed, American firms moved to cut capital spending by 30 percent. Leading the way were such companies as Occidental Petroleum, Apache Corp., Marathon Oil, Continental Resources, Oasis and Ovintiv.
But the slowdown in oil production will significantly lag the downturn in demand. The rigs that are operating will generally keep pumping. The Goldman Sachs study suggests that the biggest declines in production will occur at the end of this year and the beginning of next, primarily in the Bakken region of the Northern Plains and in the Eagle Ford fields of South Texas. And they are expected to continue on into the second half of 2021.
That suggests a loss of jobs and income for all the companies that rely on oil production — from suppliers to field servicers to truckers to railroads to trailer camp operators to diners — that could extend onward for months to come.
About 90,000 workers depend on the oil business in North Dakota, said Ron Ness, head of the North Dakota Petroleum Council; 35,000 directly and 55,000 in indirectly wouldn’t exist without the industry.
“Commodity markets have their ups and downs,” he said with a sigh. “You’ve got to be an optimist.”
If the price of oil doesn’t get back above $35, which it passed heading downward this week, he said, “we would see significant impacts. It’s a very serious matter to us.” (The benchmark West Texas Intermediate Crude was just below $33 as the workday drew to a close Friday.)
It’s an altogether different picture for Pennsylvania natural gas producers: Fewer oil wells in North Dakota and Texas mean less “associated gas,” which is extracted along with the petroleum. That could dent the natural gas glut and prop up prices for the Pennsylvania shale companies.
Anne Swedberg Robba, an analyst with S&P Global Platts, wrote in an email that if oil remains at $30 a barrel, the slowdown in production that would follow could mean an opportunity for Pennsylvania operators. To fill the gap in natural gas, they might be able to increase production by as much as four or five percentage points. Gas futures, in fact, are up this week.
Five years ago, when the Saudis pushed up their production in an apparent attempt to drive the U.S. shale industry out of business, American firms were slow to act because they weren’t sure how long the effort against them would last. But there was no coronavirus back then. Now it forms the unavoidable context for production and consumption predictions.
The signals coming from Riyadh and Moscow are also unmistakably clear.
On March 5, the Saudis tried to get the countries of OPEC and its partners, primarily Russia, to agree to a 1.5 million-barrels-a-day cut to shore up prices in the face of weakening demand. But Moscow balked, and on March 7, the Saudis made a U-turn and announced that they would not be extending a previous round of production quotas but were opening the spigot.
The Russians responded by doing the same. The price of oil plummeted and has since lost about a quarter of its value.
For a day or so, it appeared that the two sides might be bluffing, and that it would soon be over. But that hope has faded. An OPEC advisory committee meeting that was scheduled for March 18 has been canceled.
“Russia was a categorical nyet & declared the end of quotas as of April. Seems pretty straightforward,” Bob McNally, founder and president of analytical firm Rapidan Energy, wrote on Twitter.
Russia’s national budget is based on a price of $45, and the Saudi budget is about $80. But both can adjust. If the price war continues, the Saudis will take a bigger hit against their earlier projections, but they have more spare capacity than the Russians do, analysts say. So they could turn up the flow even more.
“Neither Russia nor Saudi Arabia are willing to blink just yet,” wrote Paola Rodriguez-Masiu, an analyst with Rystad Energy in Norway. “The Saudis know that if prices sink into the $20s there is a higher chance to reach a compromise within the next three months, but if prices remain in the high $30s a deal will be more difficult. Moreover, we find that it is unlikely that Russia is willing to renegotiate cuts until the full impact that the coronavirus will have in demand becomes clearer.”
What that would mean for American oil companies and workers is not in doubt. The longer this lasts, the tougher it will be. But the Goldman Sachs study offers one note of consolation: “If the downturn is sharp enough, and long enough (12 months or more), it should lead to the potential of a much sharper recovery when it does happen.”