The onslaught of frenzied selling of US crude oil this week, which seems to be continuing even after the expiry of the May futures contract, will reshape global oil markets but also the future of the US oil industry for years to come.
Independent US oil producers are on the brink of destruction, and bankruptcies are expected to increase exponentially. Financial pressure is piling up on companies as their creditors ask for their loans to be repaid and financial institutions are taking a hit from the collapse of the May futures contract into negative values.
The market onslaught was mainly a result of the specific structure of US oil markets, which were primarily set up to meet the needs of American industry and supply the domestic market with the energy it needed to grow. The setup of its oil and gas pipeline infrastructure, which all ends up at the world’s largest oil storage facilities in and around Cushing, Oklahoma, has become a deathtrap.
The current worldwide oil glut, created in part by a decade of US production increases from shale fields, has now transformed Cushing into a chokepoint, where a lack of oil storage and transport capacity pushed the oil price into negative territory for the first time on Monday.
Global markets are not yet in the same situation. In contrast to the West Texas Intermediate market, North Sea Brent Blend crude oil still has a level of support, mainly due to its access to the global market. The US market anomaly has been known for a long time, but when global oil demand was rising, surplus US shale volumes were able to reach international customers. With the current unprecedented levels of demand destruction, estimated at 20-25 percent of the world market, customers are not interested or able to take on new volumes. US producers are going to be the main casualties of their own success.
When Saudi Arabia called for a global compact on oil output cuts, it is worth noting that the United States, the world’s top oil producer, did not participate in the deal. The US government did not offer any tangible support to the global agreement to avoid a glut by making shared, pre-emptive cuts in production. They offered up supply cuts by independent oil producers who were closing wells anyway because they were economically unsustainable.
The result of this policy is there for everyone to see. US oil producers continued to pump record volumes of crude oil into a saturated market, where traders could not even find enough storage to keep the oil.
US President Donald Trump thought that by asking OPEC and Russia to cut production, he could prevent a market glut in America, but he was sorely mistaken. Today, global markets are set to return towards balance even while the US market continues to drown in a glut of oil.
Washington seems not to have understood that encouraging OPEC and allies to cut would not relieve pressure on the US shale industry. The cut agreed by OPEC and other producers has only put more pressure on shale producers as they did not voluntarily cut production.
By complying with international pressure and cutting production, OPEC, Saudi Arabia and Russia have forced the US into a corner. Having followed Trump’s call to limit output, OPEC can’t be blamed for the crisis afflicting the US market.
If there is an oil market war, an OPEC victory is on the horizon. Without even putting in place an aggressive market strategy, OPEC and its allies have been able to exploit the weakness of their opponent and global demand destruction to their advantage. In the coming years, OPEC, Saudi Arabia and Russia will be back on top of global oil, showing their market leadership. No market participant will come out of 2020 unscathed, but OPEC and their allies will come out stronger than they were at the end of 2019.
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