Week Ending April 10, 2020

With Rig Counts Dropping, Slight Hope Raised on Global Production Cuts

This Article Appears as Published in Foster Report No 3294
With Rig Counts Dropping, Slight Hope Raised on Global Production Cuts

As producers cut spending and operations in the U.S. and abroad, there was a glimmer of hope that oil prices might rise after an April 9 agreement in principle was reached by “OPEC plus” nations to trim production by 10 million barrels/d for two months.

That agreement, which hinges on Mexico’s participation, is to be followed by an April 10 meeting by a Group of 20 (G20) energy ministers to discuss the global oil market, the COVID-19 pandemic that has cratered fuel demand and whether other nations may throttle back production.

The debate about whether the states or provinces in the U.S. and Canada should scale back production is continuing, with views that differ between nations and companies, aside from whether such moves would affect global prices. The “OPEC plus” nations, essentially OPEC and Russia, want U.S. drillers to limit production, while U.S. and Canadian officials question such a move that would have to come from states and provinces. Alberta officials point to existing production cuts that have been in place for more than a year and the Texas Railroad Commission (TRC) is considering use of prorationing authority that has not been used since 1973.

Because the U.S. and Canada have thousands of producers that operate independently, unlike many of the global suppliers that are backed by nations, the ability of regulators to affect oil production is limited, officials have pointed out. Several major producers have asked the TRC not to use its prorationing authority ahead of a planned April 14 hearing on the matter, while other producers have asked the state regulators to limit production to provide price relief.

As oil prices have stayed in the low $20s/barrel for about a month now, dozens of U.S. producers have slashed budgets and halted activities in oil-rich producing basins, with several small producer bankruptcies and a Chapter 11 filing by Whiting Petroleum April 1. U.S. rig counts have plunged by nearly 200 since the middle of March, reaching about 640, according to market data. The most recent weekly rig count decline of 80 was the largest drop in more than five years.

Consulting firm Rystad Energy has estimated that the number of rigs operating in the U.S. could fall by 65%, to about 200, though that estimate was made before the agreement on a global production cut was announced. The slashing of expenses and operations in the current cycle is happening much faster than previous downturns in the oil market and the impacts are large instead of gradual, said Artem Abramov, head of shale research at Rystad.

Almost all of the rigs being idled were focused on oil, as natural gas prices have limited the production impact on that sector, though plenty of the oil rigs had associated gas production that will cut into gas production figures.

The American Petroleum Institute (API) is among the groups that welcomed the “OPEC plus” decision, though it has resisted pushing for market interference and guarded against overreacting. Some entities have lobbied for tariffs on oil imports into the U.S., sanctions against countries or other measures after Russia and Saudi Arabia, and some allies, started ramping up production amid a dispute among “OPEC plus” nations.

The decision by government-owned oil companies to cut production by 10 million b/d for a two-month period starting May 1 is a good step, said API President and CEO Mike Sommers. “While this move will help stabilize world oil markets, significant challenges remain throughout the supply chain since current market disruptions are driven largely by this historic drop in demand as a result of the COVID-19 pandemic. The best thing for the energy industry – and the entire U.S. economy – is to slow the spread of COVID-19 and stimulate the economy until demand stabilizes and it’s safe for Americans to return to work,” Sommers said in a statement.

The online “OPEC plus” meeting was hosted by Saudi Arabia and Russia and it resulted in reaffirming a declaration of cooperation from 2019, with downward adjustments of oil production by 10 million b/d for two months starting May 1. For six months starting July 1, the adjustment moves to 8 million b/d, followed by a period of 16 months with an adjustment of 6 million b/d.

The baseline for the adjustment calculations is oil production as of October 2018, except for Saudi Arabia and Russia, both of which have the same baseline level of 11 million b/d, OPEC said in an April 9 statement.

The statement calls upon all major producers to contribute to the efforts aimed at stabilizing the global oil market. The nations agreed to hold another meeting June 10 to determine if further actions are needed to balance the market.

Mexico was the only country that took part in the meeting that did not agree to participate in the declaration of cooperation. As a result, the agreement is conditional on the consent of Mexico, according to the statement.

The head of the International Energy Agency, Fatih Birol, expressed hope that the G20 meeting of energy ministers can bring some much-needed stability to the oil market at a time when many nations’ economies are reeling from COVID-19. The current oil crisis is a shock that threatens financial stability and it requires a global answer, Birol said April 10.

“It is heartening to see countries representing more than 70% of global oil production and 80% of global oil consumption coming together for a constructive dialogue,” Birol said.

U.S. Secretary of Energy Dan Brouillette issued remarks prepared for the G20 meeting, noting that all participating nations have been affected by the oil market turmoil and COVID-19 reducing demand. The U.S. has seen its oil sector “gravely impacted,” with estimates of production declining up to 3 million b/d by the end of 2020.

The dual-pronged crisis of the precipitous oil price decline and the Coronavirus require swift and decisive actions from all parties, with stopping the virus a necessary condition for boosting demand and recovering economies, Brouillette said.

“For full recovery to occur, we must stabilize world energy markets by putting an end to this dangerous price decline,” according to Brouillette’s prepared remarks. He termed the lack of agreement among all nations on the 10 million b/d production cut extremely disappointing.

“This is a time for all nations to seriously examine what each can do to correct the supply/demand imbalance. We call on all nations to use every means at their disposal to help reduce the surplus,” Brouillette said, noting that the U.S. has made capacity available at the Strategic Petroleum Reserve to take some oil off the market.

U.S. leaders will look for more opportunities to ease the pain felt by producers, Brouillette said.

Since global production has been on the rise among “OPEC plus” nations following the disagreement between Saudi Arabia and Russia, oil storage inventories have been rising significantly. In response to a recent request from Sen. Lisa Murkowski (R-Alaska), the Energy Information Administration (EIA) on April 8 agreed to publish a weekly estimate of U.S. oil storage capacity utilization as part of EIA’s weekly petroleum status report.

Murkowski thanked EIA Administrator Linda Capuano for taking swift action in response to her request.

“The timely collection and analysis of data related to petroleum storage will help the U.S. energy industry better assess market conditions, and provide a measure of certainty during these unprecedented times,” Murkowski said. The information will also help DOE as it opens SPR capacity for temporary storage of up to 30 million barrels of U.S. oil, the lawmaker added.

By Tom Tiernan ttiernan@fosterreport.com

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