Oil hits rock bottom — and there are ‘not a lot of good options’ to halt skids
White House seeks answers, but demand is the issue
WASHINGTON — Governments around the globe are scrambling to figure out what, if anything, they can do to arrest the collapse of oil prices after they turned negative in Monday’s unprecedented collapse.
With up to a third of global oil demand gone because of stay-at-home orders to slow the spread of the coronavirus, the usual methods of small production cuts or filling the nation’s oil reserves are unlikely to do much to move markets, raising question about governments’ ablities to manage the panic.
“The government has a lot of options, but not a lot of good options,” said Glenn Schwartz, director of energy
policy at the Rapidan Energy Group, a consulting firm in Washington. “None of it is going to put (oil) back to $30 or $40 barrel, besides a vaccine maybe. If people aren’t driving anwyhere, that’s what needs to happen. There’s just too much crude out there.”
President Donald Trump has asked Treasury Secretary Steve Mnuchin and Energy Secretary Dan Brouillette to make funds available to oil companies to help get them through the panic, tweeting Tuesday, “We will never let the great U.S. Oil & Gas Industry down.”
That might help individual oil companies delay bankruptcy and maintain their workforces, but it isn’t expected to do much to help oil prices, which continued to fall Tuesday.
Trump urges action
The price of West Texas Intermediate, the U.S. benchmark settled at $10 a barrel a day after closing at negative $37 a barrel. But WTI contracts for delivery in June dropped by more than 30 percent to $13 a barrel, and Brent, the European benchmark, fell more than 20 percent to $20 a barrel.
The longer rock-bottom oil prices persist, the larger the threat they pose to the Houston economy, which is inextricably tied to oil and gas. The industry employs some 265,000 people in the region, and companies have already cut or placed on furlough several thousand workers locally. Some estimates put potential industry job losses at no less than 10 percent. Those job cuts will ripple through manufacturing, real estate, retail and almost every sector of the local economy.
At a press conference Monday night, Trump said he is considering cutting off imports of crude, as some Republican lawmakers have suggested. At the same time, he has again called for filling the Strategic Petroleum Reserve to provide some relief to domestic oil companies. The U.S. emergency stockpile has a capacity of 713 million barrels, according to the Energy Department.
“Well, I’ll look at it,” Trump said when asked about using his executive power to block imports. “Nobody’s ever heard of negative oil before.”
But the administration also is reportedly considering more extreme action, including paying oil companies to shut down wells, something that would likely require congressional approval.
A day after the worst market crash in oil history, no one is ruling anything out.
State regulators in Texas, Oklahoma and North Dakota are considering putting limits on oil production, with the Texas Railroad Commision electing Tuesday to put the decision off another two weeks.
“More words and action are likely to come from major oil-producing governments,” said Jim Burkhard, vice president at the research firm IHS Markit. “It remains to be seen what those actions could be. But governments do things they would not normally consider when conditions become intolerable.”
The oil sector is divided on whether government intervention is desirable, with most larger companies wary of opening a door to government oversight that might come back to haunt them in the future.
‘More harm than good’
“Proposals for government interventions — imposing tariffs on imports and quotas on domestic production and/or paying companies not to produce oil — ultimately do more harm than good,” Mark Green, a writer with the American Petroleum Institute, wrote on the trade group’s website Tuesday. “Government should focus instead on flattening the curve and getting a better handle on the spread of the virus so that economies can safely start back up again.”
For now government officials are largely sticking to a familiar playbook.
Saudi Arabia and other members of OPEC are considering moving ahead immediately instead of waiting until next month to begin production cuts that the cartel, its allies and other oil-producing nations agreed to set at 10 million barrels a day, the Wall Street Journal reported Monday.
The head of the International Energy Agency, the Paris-based orgaization that represents oil importing countries, tweeted Tuesday that countries with oil reserves should make extra storage available to get some excess crude off the market.
And there is again movement in Congress to fund Trump’s request to fill the U.S. petroleum reserve, requiring the purchase of about 77 million barrels of crude.
Rep. Lizzie Fletcher, DHouston, introduced bipartisan legislation Tuesday to request that the U.S. government begin to buy up oil.
“We must recognize that this price drop is a direct result of decreased demand because of the COVID-19 pandemic, and we must do all we can to combat this virus at home and around the world,” she said. “While this is a smart and important effort, it will not solve the underlying demand problem.”
But she and her allies are likely to face opposition in the Democrat-controlled House, with many Democrats rejecting the idea of filling the strategic reserve as a handout to the oil industry.
In a letter last month, Senate Minority Leader Chuck Schumer, R-N.Y., rejected the funding as a “bailout for Big Oil.”
The Department of Energy earlier estimated the cost of filling the reserve at $3 billion. But with West Texas Intermediate for delivery in June trading at $13 a barrel, that same amount of crude could be had for about $1 billion.