As Saudi Arabia and Russia dig in their heels and prepare for extended trench warfare over oil prices, the important questions now are: how long will this last, and what (or who) can bring these friends-turned-foes back to the negotiation table? China is the major buyer of crude from both countries, but with little production of its own, should be relishing in lower oil prices, particularly as it plots a potential recovery from the Covid-19 pandemic. That leaves the USA.
To say the US has a vested interest in where oil prices are is an understatement. The country, after all, has a major oil production industry and has recently become the largest producer in the world. Prices at US$50-60/b were perfect. Anything above that risked higher fuel prices causing demand disappearance; anything lower than that risked putting American drillers – particularly in the prolific shale patch – out of business. Which is why President Donald Trump embarked on a campaign of sanction threats and fiery rhetoric when crude rose above US$70/b last year. And also why the US oil industry is urging an intervention as WTI crashes to nearly US$20/b. At risk is not just the health of the US oil industry, but the very life of the shale patch.
There are various options available to Trump when he intervenes. Trump said that he would only get involved in the price war ‘at the appropriate time’, noting that low gasoline prices were good for US consumers. This suggests that he values the positive effects of low oil prices on the wider economy, perhaps noting that the oil industry will still remain a solid electorate base for him in November 2020 come what may. But with no sign that Russia or Saudi Arabia are open to new talks, Trump has to do something at some point.
Some new policies have been put in place. Instead of selling barrels from the US strategic petroleum reserves, adopted when the global supply/demand dynamics were much, much different – the White House now wants to fill those coffers to the brim, buying as much as US$3 billion from US independents to shore up the industry. But that’s only a temporary balm; if the price war rolls on for too long, those US independents will either go out of business or be forced to continue pumping to pay the bills. Either way, this won’t achieve much.
The next weapon is diplomacy. There is already happening, with the US Senate reaching out to the Saudi Ambassador to seek ‘clarity’. Diplomacy is likely to be taken with Saudi Arabia and its Middle Eastern allies, as a more combative approach could jeopardise geopolitical alliances. However, when cajoling, the US will also have to put something on the table. Saudi Arabia’s ultimate goal is to have steady oil prices at a level acceptable to all (or most); since Russia isn’t cooperating but the US may want to, then it must shoulder some burden as well. Imposing a national quota in the US, however, is pure anathema, although the Texas state oil regulator has already suggested introducing production curbs. President Donald Trump said on Thursday, 2nd of April that he expected Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman to announce a deal to cut production by up to 15 million barrels, and that he had spoken to both countries’ leaders.
The much anticipated virtual meeting between OPEC and its allies scheduled for 6th of April has been postponed, as reported by CNBC, amid mounting tensions between Saudi Arabia and Russia. The meeting will now “likely” be held on Thursday, 9th April, sources said. "The delay is likely to hit oil prices next week following a record-setting comeback week for crude. U.S. oil surged 25% on Thursday for its best day on record, and gained another 12% on Friday. It finished the week with a 32% surge, breaking a 5-week losing streak and posting its best weekly performance ever, back to the contract’s inception in 1983."
The other more potent weapon is sanctions. This has worked well, at least from the perspective of the policy’s goal, but certainly not in humanitarian terms in Iran and Venezuela, where the exports of these OPEC members have shrunk dramatically. The US has already imposed sanctions on certain parts of the Russian energy machinery, notably to stop the Nordstream-2 LNG pipeline and is now reportedly considering pursuing a dual-pronged strategy of diplomacy with Saudi Arabia and sanctions on Russia. But what could this do? What would this even achieve? Russia hardly sells much oil to the US; its markets are in Europe, India and China. Imposing sanctions, especially at a time of a global crisis, risks it being completely ignored. Worse, this would make Russia even more determined to get back at the US by destroying the shale patch. With its deep pockets, it could very well do so.
The US is caught in a dilemma. Participating in a coordinated production alliance is unthinkable existentially, although stranger things have happened which leaves Trump with few weapons to participate in this price war. It could go on the offensive, and risk worsening the situation. It could exert diplomatic pressure, and risk that going nowhere. Or it could do what it has always done: prop up the industry but leave survival to the free-market, with the knowledge that in the cyclical world of oil, this bust will one day become a boom again.
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Two acquisitions in the energy sector were announced in the last week that illustrate the growing divergence in approaching the future of oil and gas between Europe and the USA. In France, Total announced that it had bought Fonroche Biogaz, the market leader in the production of renewable gas in France. In North America, ConocoPhillips completed its acquisition of Concho Resources, deepening the upstream major’s foothold into the lucrative Permian Basin and its shale riches. One is heading towards renewables, and the other is doubling down on conventional oil and gas.
What does this say about the direction of the energy industry?
Total’s move is unsurprising. Like almost all of its European peers operating in the oil and gas sector, Total has announced ambitious targets to become carbon-neutral by 2050. It is an ambition supported by the European population and pushed for by European governments, so in that sense, Total is following the wishes of its investors and stakeholders – just like BP, Shell, Repsol, Eni and others are doing. Fonroche Biogaz is therefore a canny acquisition. The company designs, builds and operates anaerobic digestion units that convert organic waste such as farming manure into biomethane to serve a gas feedstock for power generation. Fonroche Biogaz already has close to 500 GWh of installed capacity through seven power generation units with four in the pipeline. This feeds into Total’s recent moves to expand its renewable power generation capacity, with the stated intention of increasing the group’s biomethane capacity to 1.5 terawatts per hour (TWh) by 2025. Through this, Total vaults into a leading position within the renewable gas market in Europe, which is already active through affiliates such as Méthanergy, PitPoint and Clean Energy.
In parallel to this move, Total also announced that it has decided not to renew its membership in the American Petroleum Institute for 2021. Citing that it is only ‘partially aligned’ with the API on climate change issues in the past, Total has now decided that those positions have now ‘diverged’ particularly on rolling back methane emission regulations, carbon pricing and decarbonising transport. The French supermajor is not alone in its stance. BP, which has ditched the supermajor moniker in favour of turning itself into a clean energy giant, has also expressed reservations over the API’s stance over climate issues, and may very well choose to resign from the trade group as well. Other European upstream players might follow suit.
However, the core of the API will remain American energy firms. And the stance among these companies remains pro-oil and gas, despite shareholder pressure to bring climate issues and clean energy to the forefront. While the likes of ExxonMobil and Chevron have balanced significant investments into prolific shale patches in North America with public overtures to embrace renewables, no major US firm has made a public commitment to a carbon-neutral future as their European counterparts have. And so ConocoPhillips acquisition of Concho Resources, which boosts its value to some US$60 billion is not an outlier, but a preview of the ongoing consolidation happening in US shale as the free-for-all days give way to big boy acquisitions following the price-upheaval there since 2019.
That could change. In fact, it will change. The incoming Biden administration marks a significant break from the Trump administration’s embrace of oil and gas. Instead of opening of protected federal lands to exploration, especially in Alaska and sensitive coastal areas and loosening environmental regulations, the US will now pivot to putting climate change at the top of the agenda. Although political realities may water it down, the progressive faction of the Democrats are pushing for a Green New Deal embracing sustainability as the future for the US. Biden has already hinted that he may cancel the controversial and long-running Keystone XL pipeline via executive order on his first day in the office. His nominees for key positions including the Department of the Interior, Department of Energy, Environmental Protection Agency and Council on Environmental Quality suggest that there will be a major push on low-carbon and renewable initiatives, at least for the next 4 years. A pledge to reach net zero fossil fuel emissions from the power sector by 2035 has been mooted. More will come.
The landscape is changing. But the two approaches still apply, the aggressive acceleration adopted by European majors, and the slower movement favoured by US firms. Political changes in the USA might hasten the change, but it is unlikely that convergence will happen anytime soon. There is room in the world for both approaches for now, but the future seems inevitable. It just depends on how energy companies want to get there.
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In its January Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) expects global demand for petroleum liquids will be greater than global supply in 2021, especially during the first quarter, leading to inventory draws. As a result, EIA expects the price of Brent crude oil to increase from its December 2020 average of $50 per barrel (b) to an average of $56/b in the first quarter of 2021. The Brent price is then expected to average between $51/b and $54/b on a quarterly basis through 2022.
EIA expects that growth in crude oil production from members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) will be limited because of a multilateral agreement to limit production. Saudi Arabia announced that it would voluntarily cut production by an additional 1.0 million b/d during February and March. Even with this cut, EIA expects OPEC to produce more oil than it did last year, forecasting that crude oil production from OPEC will average 27.2 million b/d in 2021, up from an estimated 25.6 million b/d in 2020.
EIA forecasts that U.S. crude oil production in the Lower 48 states—excluding the Gulf of Mexico—will decline in the first quarter of 2021 before increasing through the end of 2022. In 2021, EIA expects crude oil production in this region will average 8.9 million b/d and total U.S. crude oil production will average 11.1 million b/d, which is less than 2020 production.
EIA expects that responses to the recent rise in COVID-19 cases will continue to limit global oil demand in the first half of 2021. Based on global macroeconomic forecasts from Oxford Economics, however, EIA forecasts that global gross domestic product will grow by 5.4% in 2021 and by 4.3% in 2022, leading to energy consumption growth. EIA forecasts that global consumption of liquid fuels will average 97.8 million barrels per day (b/d) in 2021 and 101.1 million b/d in 2022, only slightly less than the 2019 average of 101.2 million b/d.
EIA expects global inventory draws will contribute to forecast rising crude oil prices in the first quarter of 2021. Despite rising forecast crude oil prices in early 2021, EIA expects upward price pressure will be limited through the forecast period because of high global oil inventory, surplus crude oil production capacity, and stock draws decreasing after the first quarter of 2021. EIA forecasts Brent crude oil prices will average $53/b in both 2021 and 2022.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO)
You can find more information on EIA’s expectations for changes in global petroleum liquids production, consumption, and crude oil prices in EIA’s latest This Week in Petroleum article and its January STEO.
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