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Can the world agree a deal to boost oil prices?

Oil-producing countries plan to hold an online meeting in the next few days to discuss how to manage the market. The US will find it hard to make a contribution

1 minute read

Ed Crooks

Vice-Chair, Americas

Ed examines the forces shaping the energy industry globally

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“There are decades where nothing happens; and there are weeks where decades happen,” Lenin is supposed to have said. In the oil market, this has been one of those weeks. On Monday Brent crude was at times trading below $22 a barrel. By Friday morning it was more than $11 a barrel higher, up about 50% over the week.

The revival has been sparked by hopes that the world’s leading producers, including Saudi Arabia, Russia and possibly the US, can agree a way to bring the oil market back into balance after the slump in demand caused by the coronavirus pandemic. Oil-producing countries, including the OPEC+ group and others, aim to hold an online meeting in the next few days, inspiring optimism that the market can be brought back to equilibrium more quickly than through the grinding attrition caused by low prices.

It was always clear that a crude price in the low $20s could not be sustained for long. At those levels, a significant proportion of the world’s oil production does not even cover its short-run operating costs, and would sooner or later have to be shut in. Those prices would be ruinous for some oil-producing countries, too. But governments still have a way to go before they can show that they have a solution and are able to implement it.

The rally began on Thursday, when President Donald Trump announced on Twitter, through CNBC and in a press briefing, that he had he spoken to President Vladimir Putin of Russia and Crown Prince Mohammed bin Salman of Saudi Arabia, and that he expected them to cut production by up to “15 million barrels”.

Assuming that the unspoken but implied “per day” is added, that would be a scale of reduction commensurate with the shock to demand. World oil consumption in the second quarter is on course to average about 8.1 million barrels per day less than in the same period of last year, according to Wood Mackenzie’s Macro Oils service. To show that the president was not just speculating hopefully, close US ally Saudi Arabia quickly issued a statement calling for a meeting of oil-producing countries, and that meeting, by video conference, has now been set for Monday.

President Trump has a particular reason to seek an international agreement on the oil market, because the US is showing some of the greatest signs of strain. The storage complex at Cushing Oklahoma is on course to be full by the second half of next month at current rates, and physical constraints have been driving down prices to well below the WTI benchmark. Oil from some new wells in the Permian Basin was being sold for just $6 a barrel earlier in the week. The price for one grade of US oil, Wyoming Asphalt Sour, actually turned negative, with at least one trading house demanding 19 cents a barrel to take it away.

The big flaw in President Trump’s plans to solve those problems with an international agreement is that the US industry is far from united on whether the market needs to be managed. Some companies support the idea. Pioneer Natural Resources and Parsley Energy this week filed a motion with the Texas Railroad Commission, calling on it to investigate “whether the waste of oil and gas is taking place in Texas”, and if so, to take measures to restrict production. Ryan Sitton, one of the commissioners, said the RRC would be holding an online meeting on April 14 to hear industry views on whether there is a need to impose production quotas.

Other US companies, however, oppose government intervention. ExxonMobil said in a statement that it was “not seeking any US federal or state intervention measures in energy markets”, and argued that “the operation of the free market is the most efficient means of resolving the extreme supply and demand imbalances we are now experiencing.”

One possible tactic for the US would be threatening to impose tariffs on imported oil if other countries did not agree to curb their production. But on Wednesday the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers association sent a letter to President Trump urging him not to take that step. The two industry groups warned that “Imposing supply constraints, such as quotas, tariffs, or bans on foreign crude oil would exacerbate this already difficult situation [and] jeopardize the short and long-term competitiveness of our refining sector world-wide.”

Leading oil industry executives have been invited to the White House on Friday afternoon to discuss the crisis the industry faces. Indications before the meeting suggested most would be advocating for an unambitious agenda including relief on royalties and some environmental regulations, and the use of the spare capacity in the Strategic Petroleum Reserve to absorb some of the excess oil on the market.

The result is that unless the Trump administration decides to support radical measures, against the wishes of many in the industry, it will not have much to offer at the talks on Monday in terms of contributing to an international agreement on curbing production. Larry Kudlow, director of the US National Economic Council, admitted as much on Friday when he said on Bloomberg TV that the administration “cannot dictate decisions on oil production to US companies”.

The Wall Street Journal reported that the Trump administration had discussed ordering all platforms in the Gulf of Mexico to be shut down as a precaution against spreading the coronavirus, but such a move would be difficult and highly controversial. The best hope for the US may be using its diplomatic leverage with Saudi Arabia, although that influence has its limits. It should be no surprise, then, that the administration is emphasising that it is helping the oil industry through its general effort to boost the US economy. At a press briefing on Thursday, Steven Mnuchin, Treasury secretary, said there would not be special help for the energy industry, but companies would be eligible for support from the general corporate relief programmes offered by the government. The coronavirus is causing hardship everywhere, as the terrible US jobs numbers showed on Friday, and it would be over-optimistic for the oil industry to think that its problems can be solved without a wider recovery.

Other coronavirus news

India has imposed the world’s largest lockdown, having a dramatic impact on the country’s energy use. Consumption of power, gas and oil products has fallen sharply, as have its levels of air pollution. The number of reported coronavirus cases in India rose to about 2,000 on Thursday, but there are concerns that the lack of testing capacity and the weakness of the healthcare system mean that the true rate of infection is being greatly under-reported. Ramanan Laxminarayan of the Washington-based Center for Disease Dynamics, Economics and Policy warned that “it’s likely that it will just rip through the population” in India.

In China, TomTom congestion data show that Wuhan, where the initial outbreak occurred, remains very quiet. Beijing and Shanghai, meanwhile, seem almost back to normal during the week, although still quiet at the weekends. Power generation in the first quarter was well down on the same period of last year, but for the second quarter it is likely to be about the same as it was a year ago, according to Wood Mackenzie forecasts.

The share prices of US coal companies have been slumping, as the coronavirus shutdowns and economic downturn hit power demand across the US.

Meanwhile, US grid operators have been sequestering staff and taking other precautions to make sure they can keep the lights on.

The steep drop in Spain’s fuel demand caused by its lockdown has been detailed by CLH, the products pipeline and storage operator. Shipments in March were down 35.5% for gasoline and 26.5% for diesel. The Spanish government announced a state of emergency and national lockdown on March 14, meaning that the restrictions applied for half the month.

Whiting Petroleum was the first US E&P company to file for Chapter 11 bankruptcy protection in the latest downturn. Other companies can be expected to follow in the coming months.

BP became the latest of the oil majors to announce deep cuts in spending. It is cutting 2020 capital spending by 25% from its previous plan, to US$12 billion, and aims to save US$2.5 billion from cash costs by the end of next year. In a LinkedIn post, Bernard Looney, chief executive, said the company would not be making any job cuts for BP employees over the next three months. He said in his statement that the plan to raise US$15 billion from asset sales by mid-2021 remained on track.

BP also detailed some of the precautions it was taking to protect staff during the pandemic. It has been reducing non-essential activities and manning levels, moving thousands of construction workers off the site of the Tangguh LNG expansion project in Indonesia. Several workers on a BP platform in the Gulf of Mexico have tested positive for the coronavirus, as has a worker at Prudhoe Bay in Alaska.

Royal Dutch Shell has secured a new US$12 billion credit facility as it seeks to safeguard its dividend.

Local air pollution may help the Covid-19 coronavirus spread, Italian scientists have suggested.

The COP 26 climate conference, at which countries were intended to set out more ambitious goals for cutting emissions than they put forward at the Paris summit in 2015, has been postponed. It was scheduled for Glasgow in November, and will now be held in the same city next year.

And finally, some much-needed light relief. Anyone who has worked with wind turbines or electric vehicles will know about the power and usefulness of neodymium magnets. The Guardian reported on the story of an Australian astrophysicist who tried to use the magnets to make a device to help stop the spread of the coronavirus, but ended up in hospital.

More coverage of energy in the coronavirus crisis

Wood Mackenzie now has a special page pulling together our latest insights on the consequences of the coronavirus for the energy industry. They are free to read.

For rolling updates on the impacts on renewable energy, storage and the grid, you can also follow the excellent rolling update of news and analysis from Greentech Media, part of the Wood Mackenzie group.

Other news in brief

The US administration published the final versions of its new standards for vehicle emissions and fuel economy. In 2012 the manufacturers agreed with the Obama administration on standards that were intended to become steadily more stringent for vehicles sold in model years 2022-25. The Trump administration has decided to relax those rules: the old regulations would have required increases in efficiency averaging about 5% a year, and the new standard calls for an annual improvement of just 1.5%. The administration estimates that the new rule will add about 1.9-2 billion barrels to US fuel consumption over the lifetime of the vehicles covered.

California and 22 other states want more stringent standards, and aim to fight the new regulations in court, leading to an uncertain position for the vehicle industry. Four leading manufacturers — Ford, Honda, Volkswagen and BMW — agreed last year to meet California’s more demanding standards, and Volvo said this week it planned to join them.

The proposed Keystone XL pipeline to carry heavy crude from Alberta into the US first filed for regulatory approvals back in 2008. Almost 12 years on from that first application, the project is at last going ahead, its owner TC Energy said this week. The government of Alberta has made an equity investment of US$1.1 billion to help the project go ahead, covering construction costs until the end of the year. The pipeline is intended to be in service in 2023. Wood Mackenzie’s senior analyst April Read noted that the construction work “adds much needed jobs in the oil and gas industry during a challenging period.”

Equinor, the Norwegian energy group, plans to leave the Independent Petroleum Association of America, on the grounds that its “lack of position on climate leaves the association materially misaligned with Equinor’s climate policy and advocacy position”.

As spring arrives, solar generation in Germany is ramping up. Solar provided 15.7% of the country’s power in the week to March 29, compared to an average of 9% in 2019.

The city of Redondo Beach in California is pushing for the closure of a local gas-fired power plant by the end of the year, raising concerns that it will leave the region without adequate generation capacity on hot summer evenings.

The oil and gas industry has come under mounting pressure in recent years to curb its methane emissions, while the coal industry has attracted relatively little attention. A new study has suggested methane emissions from coal mines may be much greater than previously estimated.

Other views

Simon Flowers — The oil industry’s rapid response to the crisis

Gavin Thompson — Is China embarking on a major expansion of coal-fired power generation?

Isaac Maze-Rothstein — Lessons from the first 100 percent battery-electric bus fleet in the US

Jason Bordoff — Sorry, but the virus shows why there won’t be global action on climate change

Ted Nordhaus and Alex Trembath — It's the economy, stupid: Achieving major climate benefits through Covid stimulus will require a shift in mindset

Justin Guay — Could the coronavirus forever alter the fossil fuel era?

Michael Lynch — The oil price war pits efficiency against security

Quote of the week

“Today, the Kingdom calls for an urgent meeting for OPEC+ group and other countries, with aim of reaching a fair agreement to restore the desired balance of oil markets. This invitation comes within framework of the Kingdom's constant efforts to support the global economy in this exceptional circumstance, and in appreciation of President Donald Trump of the United States of America's request.” — Saudi Arabia’s official press agency issued a statement calling for a meeting of oil producers including the OPEC+ group and others, to try to achieve the coordinated rebalancing of the oil market that has so far proved elusive.

Chart of the week

This graphic underlines the scale of the spending cuts being made across the oil and gas industry in the past few weeks. It comes from an opinion column by Andy Tidey, Wood Mackenzie’s head of performance improvement, and shows the percentage cuts in capital spending announced by leading companies since the oil price crash in March. It is worth reading in conjunction with another piece of Wood Mackenzie research, showing that US$110 billion worth of potential investment previously scheduled to go ahead this year will now almost certainly be deferred, with another US$100 billion at risk.

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