Hollywood couldn’t write a screenplay like what’s going on in oil right now

The world oil market has more intrigue than a television episode Dallas. Unfortunately, this is not a spectacle and has very real consequences.

It’s hard to keep up with all the twists and turns. Here is an overview of the current situation. If something is missing and I am sure there is something you will forgive the fault. The scenarios change depending on the day, if not the time.

In short, Russia and Saudi Arabia disagreed on production cuts and unleashed a total price and market war when the coronavirus started, decimating global economies and demand for oil. This drove oil prices down and wiped out many stocks from heavily indebted US oil and gas companies. Read about it in my March 8 article.

There was a virtual “OPEC ++” meeting scheduled to take place on Monday to discuss the current situation. But there was none. Sources told us over the weekend that a meeting, if it were to take place, would “probably” be held on Thursday. Few firm details have emerged, so anything can happen at this point.

By the way, what is OPEC ++?

OPEC is the 13-member petroleum organization based in Vienna, Austria. OPEC + is the vague name given to the meeting the day after OPEC, which includes Russia and a group of small producing countries. Russia is the real show, and they are helping to “bless” the OPEC agreement reached the day before. One day it became almost more important than OPEC itself.

OPEC ++ is supposed to be OPEC + on petroleum steroids. It is Russia, other OPEC + members, and essentially any other major oil producer who wishes to participate. This could include Norway, Canada or even American interests. If it seems strange and unclear, it is because it is strange and unclear. Essentially, a virtual OPEC ++ meeting aims to bring together anyone in the world who produces oil to tackle a problem that affects everyone.

As US production has increased, the past three years have brought OPEC and Russia closer together. This relationship is now, let’s say, strained.

Vladimir Putin said the original OPEC + deal was broken because the Saudis wanted to drive prices down to blow up struggling US shale oil producers, crushing American oil.

The Saudis made a rare public response, issuing a declaration that the Russian claims are “completely untrue”.

The result is this: the Saudis will not act on a reduction in production unless Russia does, but Russia may not be willing or able to reduce much in part because of their need for oil dollars and other less sexy reasons such as super cold Siberia weather conditions and the type of oil tanks they use. However, any sign of Putin and Co of a desire to cut something can help repair the fences.

The ultimate question is whether this is a very public, permanent break-up of former world best friends for oil or just a little love affair. Billions of dollars are at stake.

Ironically, this year, Saudi Arabia is the rotating president of the Group of 20 Nations. This gives the Kingdom an additional advantage in oil diplomacy outside of OPEC and OPEC +. In addition, the International Energy Agency is actively working to ensure that all producing countries, including the United States, are fully aware of the dire situation.

Agency head Fatih Birol has been working on phones for the past few days, and there are reports Friday of a special G-20 meeting.

The message sent is that, as powerful as OPEC may be, this problem is more serious.

President Trump said on April 2 that he had met with the Saudi and Russian leaders and “they will cut about 10 million barrels, and maybe much more.”

Even in a world of famous Trump tweets, this one has stayed, because most of the oil market players will gently remind you that Russia and Saudi Arabia alone cannot cut 10 million barrels combined from their production without extreme difficulties.

The Saudis have made it clear that any deal to be concluded must include a “fair” deal, which is each the nation must participate. Any deal that the Saudis would likely accept should include OPEC, Russia, Canada, Norway and, yes, the U.S. It is non-negotiable, Saudi sources say.

So can the world cut 10 million barrels a day? Yes, if everyone participates. Let’s do some calculations.

Count to 10, using comments and research from Tudor Pickering Holt, RBC Capital Markets and others.

Saudis = 4
As of April 1, the Saudis increased production to probably 12.5 million barrels a day, compared to less than 10 million barrels. Thus, they could easily return to pre-April levels, inject another million barrels cut and reach a total cut of around 4 million barrels per day.

Other OPEC = 2
Ex-Saudi OPEC is around 15 million bpd, so assuming each member country cuts production by around 12% (probably a stretch, but hey), that’s $ 2 million more.

Russia = 1.5
Russia produces around 11 million barrels a day, and 1 to 1.5 million barrels a day is probably the most they could cut, for a variety of political and technical reasons (think: high water cuts in their tanks ) way too boring to enter here.

Norway + Canada (No-Can?) = 1
Norway’s quiet oil giant has not been involved in coordinated oil cuts for nearly 20 years, but now they are apparently ready to speak. They can probably take 500,000 barrels from their output of 1.75 m b / d. Canadian producers are already cutting back because the storage tanks are almost full, so think of 500,000 more of our friends from the North.

This brings us back to 8.5 million barrels.

United States = 1.5?
It remains to be seen to what extent American producers will participate in any coordinated cut. We do not have OPEC. We do not have a domestic producer. Rystad Energy estimates that more than 9,000 companies produce oil or gas. The 10 largest American producers control about 30% of American production. This is why Trump called them to the White House. A “mini-OPEC” if you want. (The irony should not be lost on anyone, given Trump’s famous disgust for OPEC and an anti-cartel bill without PEC still floating around in Congress).

American production is already starting to decline organically, via a massive slowdown in new drilling and well depletion rates, as well as the closing of the tap on other productions. Thanks to this, if the United States manages to withdraw 15% of our production from 13 million barrels, it still removes 1.5 million barrels from the market.

10 million, the hard way.

Although the United States does not have OPEC and pricing is verboten, there is another interesting way to apply the cuts: Texas Railroad Commission.

Despite its name, this obscure agency can control Texas oil production. Two Texas oil companies, Pioneer Natural Resources and Parsley Energy, have asked the CVR to impose production cuts, which it has the power to do, but has not used since the 1970s. this effect must be approved by two of the three commissioners and president. A public hearing is scheduled for April 14.

If all of that isn’t enough, here’s another late plot: foreign oil prices may be on the way. Trump says he could impose “very substantial” taxes on imported crude oil, although he “doesn’t think [he’ll] duty.”

As American businesses and jobs suffer, there has been a growing roar for tariffs on the roughly 6 million barrels that we still import from other countries every day. It sounds like a simple solution, but like everything, it’s not that simple. First, many US refineries need the type of oil we import. In addition, about half of all U.S. oil imports come from Canada, maybe not a country we want to punish. Mexico is next. Saudi Arabia accounts for only 6% of our oil imports. Oh, and if we price Saudi oil, they may just opt ​​out of buying defense equipment made in the United States. Nothing is easy.

Short answer: no.

Longer answer: the cuts could delay the worst of the pain for a few months, as we all hope and pray for a rapid economic renaissance.

Global demand for oil is now falling between 20 and 30 million barrels a day. So even a cut of 10 million barrels a day – which would have been unthinkable in the past – is not a panacea. However, it does slow down the pain. More importantly, it slows down the filling.

World oil storage is almost at capacity everywhere. Combining most of the research I have seen, at the current rate of oversupply, every oil tank, oil pipeline, supertanker and tub will be full by mid-late May. If this happens, oil prices could become negative in some parts of the country. Yes, oil producers pay you to take their oil, because they have no place to put it.

The industry is in free fall. The average yield of an oil and gas stock this year is -65%. Many are down 80%, 90%, almost wiped out. Whiting Petroleum has filed for bankruptcy. Hundreds of other chapters 11 arrive unless the oil rises faster and faster. Tens if not hundreds of thousands of jobs are at risk in Texas, North Dakota and elsewhere.

The global stakes have never been higher, and everything will be decided in the coming days.