The Art of an Oil Deal Trump uses diplomacy to limit the harm to U.S. shale producers.
https://www.wsj.com/articles/the-art-of-an-oil-deal-11586819335?mod=opinion_lead_pos2
“So credit to Mr. Trump for using U.S. global influence to mitigate the mayhem. Russia and Saudi Arabia have agreed to take on the bulk of the cuts. After Mexico balked at an order to cut its production by 400,000 barrels a day, President Trump volunteered the U.S. to cover 300,000 barrels of its share.”
President Trump has been chasing a diplomatic victory, and he got one this weekend when he brokered a deal between the Organization of the Petroleum Exporting Countries (OPEC) and Russia to limit their production that may also limit the bloodbath in the U.S. shale patch.
OPEC and Russia have agreed to curtail their production by 9.7 million barrels a day—about 10% of global output—in May and June amid a steep falloff in demand due to the coronavirus that is expected to exceed 20% of last year’s consumption. After Russia last month refused Riyadh’s calls to cut supply, Saudi Arabia opened up its tap and slashed its crude price.
The dual supply-demand shock drove Brent crude as low as $24 a barrel and the U.S. benchmark to $20. This game of chicken wasn’t good for the Saudis, its OPEC allies or Russia, whose budgets need higher prices. Russia needs an oil price of about $40 a barrel to balance its budget, and the Saudis about $80.
Low prices are also hammering U.S. producers. Drill counts have fallen by a quarter in a month as storage facilities have filled, and the Energy Information Administration is forecasting that U.S. production will decline by two million or so barrels a day to 11 million. After raising $8.5 billion in cash, Exxon Mobil last week announced that it will cut capital spending by 30%. Chevron slashed spending by 20%. Small shale producers with large debt loads have hired restructuring advisers, and Whiting Petroleum became the first major fracker to file for bankruptcy last month.
Some of our friends have cheered the rout to prune undisciplined producers. But much of global oil supply is still controlled largely by foreign governments rather than market forces, and widespread shale bankruptcies could cause significant economic damage downstream once the coronavirus recedes.
Some banks have been preparing to take over assets of troubled producers, but a rush of bankruptcies could take months if not years to work out and isn’t the best use of bank balance sheets. Perhaps bigger producers might sweep up leases and rigs, but this isn’t guaranteed given their spending cuts.
So credit to Mr. Trump for using U.S. global influence to mitigate the mayhem. Russia and Saudi Arabia have agreed to take on the bulk of the cuts. After Mexico balked at an order to cut its production by 400,000 barrels a day, President Trump volunteered the U.S. to cover 300,000 barrels of its share.
These cuts won’t be enforced by the U.S. government and will come out of the two million or so that domestic production is forecast to fall. OPEC says sanctions on Venezuela and Iran, in addition to expected reductions by producers such as Canada, could lop off 20 million barrels a day from global supply this year, which, voila, would match demand estimates.
This math may be as illusory as a desert mirage, but it allows the Saudis to save face. And while some over-leveraged shale producers may still fail, the deal should also put the kibosh on calls for tariffs or quotas. Mr. Trump’s biggest diplomatic cudgel isn’t tariffs, but America’s military support for Saudi Arabia and the stability it lends to the region.
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