Collusion and Cooperation in the Oil Market

April 3, 2020 08:30 AM
Global oil prices exploded by a record 25%
U.S. oil producers may cut back by 10-15 million barrels of oil per day
SPR opens for storage
The Energy Report



The Phil Flynn Energy Report 

Emergency Collusion

Will the U.S. collude with OPEC plus Russia to try to save the global oil industry? Global oil prices exploded by 25%, the biggest percentage gain in history after President Trump  arranged a truce between oil-war foes Saudi Arabia and Russia. The President said that he expects the Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin could arrange one of the most significant global oil production cuts ever.

The President said he expects a reduction between 10 to 15 million barrels of oil production a day. That is about 10 to 15% of the global supply. A number that might suggest that U.S. oil producers may have to cut back as well. That may mean there may be an emergency order from the White House for U.S. energy companies to ignore anti-trust laws and reduce production to support prices during this time of unprecedented demand destruction. This should come up as President Trump meets with U.S. energy companies executives today. The Texas Railroad Commission, the organization that used to set oil prices in the old days, maybe online and join in the cut.

The head of the commission, Ryan Sitton, tweeted that he, ”Just had a great conversation with Russia's Novakav. While we normally compete, we agreed that #COVID19 requires unprecedented level of international cooperation. Discussed 10 mbpd out of global supply. Look forward to speaking with Saudi Prince Abdulaziz bin Salman soon.” While some doubt that a deal can get done, Bloomberg is reporting that an unnamed OPEC+ delegate is saying that a 10 million barrel a day production cut is doable. Russian President Vladimir Putin will hold a meeting with executives of the nation's biggest oil producers and government officials to discuss the situation what he calls “unfavorable energy market conditions, according to Kremlin's spokesman. This is a sign that Putin is ready to play ball and work on a cut. 

At the same time, the U.S. government opened up the Strategic Petroleum Reserves (SPR) for storage, allowing U.S. producers to lock in better prices in the futures markets. The wide contango is one way the U.S. government could support energy companies with little cost to the taxpayer.

Now, will us players go along. Free marketers are cringing at the idea of cooperation on oil prices. Yet with what is happening to try to keep global economies afloat and fight against the economic destruction from the coronaviruses, not exactly laissez-faire. The U.S. Department of Energy (DOE) announced a solicitation to immediately make 30 million barrels of the SPR’s oil storage capacity available to U.S. producers that are struggling with catastrophic financial losses due to the combined impacts of COVID-19 and the intentional disruption of world oil markets by foreign actors. The Department currently intends to make an additional 47 million barrels of storage capacity available after that.

So the possibility of a historic production cut along with allowing the SPR to be used for storage and hope that massive economic stimulus should have bottomed oil may be the answer.  We asked the question if oil was so bearish, why it could not close below $20. Now we wait to see if it can close above $30. It there's a 10 million barrel cut, single-digit oil is off the table, and we may start looking ahead to pent up demand.

There’s been big buyer of oil on this break and a big buyer of U.S. oil and natural gas. We know that there will be significant increases in the U.S. supply in the coming weeks, but China is buying. Reuters is reporting, “China started processing in March applications from its companies to waive import tariffs on U.S. energy goods as part of the Sino-U.S. Phase 1 trade deal and they have since bought liquefied natural gas (LNG) and liquefied petroleum gas (LPG) from the United States. The world’s largest crude importer is boosting U.S. energy imports at a time when the world is swamped with excess supply after OPEC and Russia failed to extend production cuts and as measures to curb the spread of the coronavirus undermined demand. 

Cheap U.S. energy supplies will help China lower its import costs, but the deep discounts will add further pressure on U.S. producers to shut in production after U.S. crude futures slumped to their lowest since 2002. U.S. mars sour crude has been sold to Chinese buyers at discounts between $7 and $9 a barrel to September ICE Brent futures for July arrival while the discounts for West Texas Intermediate crude (WTI) in Midland were between $6 and $7 a barrel, sources told Reuters. 

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.