A video teleconference among members of the Organization of the Petroleum Exporting Countries (OPEC) and its partners, including Russia, that once comprised the OPEC+ group of oil producers is expected to reach an agreement on crude oil production cuts of up to 10 million barrels a day to stem the glut of crude flowing into nearly full storage facilities around the world.
Even if the agreement is reached, however, it won’t have much immediate impact. Global overproduction could be as high as 30 million barrels a day, not much different from the combined daily production of the United States, Saudi Arabia and Russia, the world’s three top producers.
While the Saudis are currently producing around 12.1 million barrels a day and the Russians are producing nearly the same amount, the global coronavirus pandemic has played a major role as well. When the U.S. Energy Information Administration (EIA) reported weekly oil data on Wednesday, U.S. data for last week indicated daily production of 12.4 million barrels a day, a decline of 600,000 barrels from the prior week.
Even at that rate, however, U.S. commercial stockpiles rose by 15.2 million barrels for the week. The primary reason for stockpile growth is declining refinery usage. Just over three-quarters of U.S. refining capacity was used last week, and gasoline production dropped to 5.8 million barrels a day while inventories rose by 10.5 million barrels for the week. Total gasoline supplied, an EIA proxy for consumption, fell by more than 4.7 million barrels a day to 9.8 million barrels. The four-week average has declined by 19.2% from 9.37 million barrels a day a year ago to 7.56 million barrels this year.
The glut in crude oil supplies is about to get worse. Seven very large crude carriers (VLCCs) from Saudi Arabia are on their way to the Saudi-owned Motiva refinery in Port Arthur, Texas. Each tanker carries 2 million barrels of crude. According to a report from Bloomberg News, Saudi crude exports to the United States in March rose by 516,000 barrels a day to their highest level in a year.
At least one U.S. oilman thinks enough is enough. Kirk Edwards, president of Latigo Petroleum, sent a letter to the U.S. president in late March pointing out that 100% of the gasoline produced at the Motiva refinery is made from imported Saudi oil. Edwards wrote, in part:
[Permian Basin producers] don’t want government handouts. We do want government to stand up for us when our oil and gas industry is being undermined by the Saudis dumping oil into the United States at below market prices in an effort to ruin our domestic economy. Our government doesn’t allow China to dump steel, they would not allow China or any other country to dump excess corn or beef at below market prices to kill an industry, so why are they not stepping in today?
Edwards wants the president to impose a tariff of $40 a barrel on imported Saudi oil, but Trump has so far been reluctant to use one of his favored tools to reduce the oversupply in the oil market.
If OPEC and Russia can reach agreement on production cuts, prices will surely rise. That will not cause U.S. shale producers to reduce production because higher prices make more barrels profitable. Most U.S. shale producers can make a profit on existing wells if the price remains above $25 a barrel and virtually all can profit from oil at $30 a barrel.
West Texas Intermediate (WTI) crude oil traded up about 5.5% early Thursday at $26.50 a barrel, after hitting an intra-day high of nearly $27.50. Brent crude, the international benchmark, traded up about 4% at $34.14.
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