Trump’s Promised Oil Cuts Are for a Mug’s Game for OPEC and Allies
(Bloomberg) -- President Donald Trump appears to be pitching a drop in U.S. production in reaction to market forces as his country’s contribution to a global deal designed to save the energy industry from collapse. That would create a lose-lose situation for the OPEC+ countries inching toward output cuts of their own.
The Energy Information Administration’s latest short-term outlook, published Tuesday, shows U.S. crude production falling to 11.66 million barrels a day by June from 12.72 million in March - and even further in future months. That’s just over 1 million barrels a day of “output cuts” delivered by the market in the second quarter. It’s not a huge contribution from the world’s biggest producer, given that its president is expecting the second and third placed countries to come up with 10 million barrels between them. But at least it’s something. Or is it?
Dig a little deeper into the report and you see the EIA is projecting total production by the members of the Organization of Petroleum Exporting Countries to increase — yes, you read that correctly, increase — by 1.5 million barrels a day over the same period. Russia’s production is projected as essentially flat. So no grand alliance to end the price war and dash for market share.
It also appears to be much more sanguine about oil demand than many of the analysts and traders who are expressing opinions about what they are seeing. For April, the EIA sees global oil demand down year on year by 16.7 million barrels a day. That’s certainly a big drop, but it’s less than half that seen by oil trading giant Trafigura Group. And far lower than the 27 million barrel-a-day drop in demand forecast by Rystad Energy AS.
The net result is that the EIA sees the price of West Texas Intermediate crude averaging a little over $20 a barrel in the second quarter, only slightly below where it is now, and rising steadily from then on. Global inventories build at a maximum rate of nearly 15.5 million barrels a day in April, with a little over a third of that going into OECD commercial stockpiles. That commercial inventory rises to 3.46 billion barrels, about 11% higher than the peak reached in July 2016, before the OPEC+ group of countries began to cut output.
Despite Russia’s skepticism, why shouldn’t Saudi Arabia and the rest of OPEC+ accept this market-driven drop in U.S. production as the country’s contribution toward balancing oil supply and demand? After all, the group has a history of accepting natural decline in oil production as voluntary cuts — you don’t have to look any further than the contributions of Mexico or Azerbaijan to the just-expired OPEC+ deal to see that.
But the problem is that the U.S. “cut” is driven, at least in part, by the crude price. If OPEC+ cuts output by, say, 10 million barrels a day in May — the earliest that any deal done now could realistically have any impact — then, if the EIA has its demand numbers right, and I’m not at all sure it has, WTI prices will average something above $20 a barrel.
Given that U.S. shale oil production is highly responsive to crude prices, then the U.S. “free-market” output cut will be smaller than currently forecast by the EIA.
In a nutshell, if the Short-Term Energy Outlook is to be taken at face value, the forecast 1 million barrel a day cut in U.S. output between March and June only happens if the battle for market share between Saudi Arabia and Russia continues, driving prices down further. Accepting it as America’s contribution to supply cuts is a lose-lose option for OPEC+.
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