Energy

Putin Is Ready To Cut Oil Supply, But Demand Destruction Still Grows


Russian President Vladimir Putin said on Friday that, after sending the oil markets into a massive crash a month ago by blowing up the OPEC+ exports limitation agreement, his country is now ready to work with OPEC and other countries to implement far deeper cuts to crude production than OPEC+ had ever envisioned.

Speaking in a televised video conference, Putin proposed an arrangement that would result in removing 10 million barrels of crude oil per day from global supply. As reported by the Khaleej Times, “Putin’s dramatic change of tack from his unyielding stance of non-cooperation with the Opec in further output cuts came in the wake of a truce brokered by US President Donald Trump ahead of the upcoming Opec plus meeting scheduled for April 6.” The price for West Texas Intermediate closed at $28.34 per barrel on Friday, up by 40% since Wednesday, when news of Trump’s engagement with Putin and Saudi leader Mohammed bin Salman became public.

Has President Trump, the famous deal-maker, worked a deal that will save the U.S. domestic oil and gas industry? Let’s don’t get ahead of ourselves. While a global deal that would remove 10 millions barrel from daily oil supply would certainly help firm up oil prices, we have to remember that the effort by Russia and Saudi Arabia to flood the market only impacted the supply side of a two-sided equation. Crude prices had already dropped by more than 30% into the low-$40 range in early March before OPEC+ blew up, thanks to massive global demand destruction caused by the COVID-19 pandemic.

With the U.S. intentionally shutting down its own economy during March in a strategy to slow the spread of the virus, that demand destruction has only intensified over the past 30 days, with some projecting as much as 25% of world-wide demand for crude oil having been lost, or about 25 million barrels per day. We should also realize that, with so much anticipation now focused on it, if the upcoming emergency meeting of the OPEC+ countries should somehow fail to bear fruit along the lines proposed by Putin, then the price will come crashing back down.

And even if a new deal does get done, it will only address one side of the equation. There will still be much work to be done to return the domestic oil and gas industry to some level of health.

With President Trump suddenly playing such a high-profile role in these critical negotiations on behalf of the U.S. and its domestic industry, I reached out to Tom Pyle, the President of the Institute for Energy Research, a free-market think tank that focuses exclusively on energy issues. Mr. Pyle is familiar with President Trump’s overall outlook on energy since he was a key energy adviser on the Trump Transition Team in 2016/17, leading the Department of Energy policy effort.

What he told me could turn out to be pretty prescient. “What I think the Trump Administration needs to do is to have a full-court press, a multi-track diplomacy effort with Saudi Arabia and Russia to try to talk some sense into them,” he said, “knowing full well that we in our country don’t control our industry; we don’t control our resource, but doing the best we can in that regard. The more the OPEC cartel becomes irrelevant, the more uncertain that whole conversation will be.”

I asked Pyle how such an aggressive international strategy would square with the President’s long-stated preference for low energy prices. “The pattern I’ve seen with President Trump is that he puts America and the American people first. And his approach to energy has been very much along that vein. What can we do to make our energy industries vibrant and strong? What can we do to relieve the regulatory straight-jacket that was clamped upon the industry by design by the previous administration?

“He understands the role that energy plays in a vibrant, functioning economy. He understands the role that affordable energy plays in the manufacturing sector. All countries compete for energy and labor, and we as a country have always had relatively low energy prices – that’s how we compete. So, his policies have all been in that vein, and when left to his own devices, his default is to be a champion for oil and gas production in this country. And his policies have reflected that.”

But what if no new deal to limit exports comes about, or if it is seen as just a proverbial band-aid on a bullet wound by the markets? I asked Pyle if that gives him concern about the future of the domestic industry?

“It gives me great concern,” he said. “I feel like we are in an unprecedented time. I view the price of oil like a Goldilocks story: Too low is not good for the producer, but it’s good for the consumers. Too high, and it’s not good for the consumers, but it’s good for the producers. That price of oil needs to be just right in order for both of us to see the benefits. And we’re not even getting the benefit of the low oil and gasoline prices due to the forced demand reduction.

“But yes, it concerns me greatly, because the independent producers are the backbone of our energy industry. Like you said, they’re the ones who lead on innovation; they’re the ones who employ our families in the small towns and communities; they’re the ones who have quite honestly made our economy what it is today.

“Really, the immediate thing we need to do is to get this economy moving again. Because once demand picks up, we can start getting back to our lives.”

Exactly. U.S. producers should keep their fingers crossed for some positive developments on the supply side coming in the next few days. But until the demand side is restored, the situation for the domestic oil and gas industry remains perilous.



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