Brent oil fell this morning below levels of $ 30 a barrel, and US oil fell below $ 20 a barrel, in a violent fall, despite the OPEC agreement.
After a painful month that oil traders went through last March, they thought that the pain ended with OPEC reaching a historic agreement that is the largest of its kind, and will wipe out global production by 10%. But none of the expectations were true.
The market suffers from a strong glut, and disputes continue to wait for a free market, despite everything.
In Texas, the US oil capital, and before the OPEC + meeting, a number of producers expressed that this deal was not appropriate to the nature of their work, and that if the Texas Railroad Authority imposed any restrictions similar to OPEC, all drilling activities would cease.
On Tuesday, observers were surprised when they heard from the chief financial officer of Diamond Energy that the company was considering launching a war if it had been forced to cut production.
The industry is deeply divided over the proposal, although the global market suffers from a glut, amounting to 700 million barrels, according to Citigroup estimates. Corona literally eliminated oil demand.
The company’s chief financial officer said they have already reduced their activity by 30%, and they would go to zero if the states tried to impose any restrictions on them. This movement has dire consequences for jobs and the lives of families whose parents work for that company.
In the event that tariffs are imposed on us, we will stop all services from our suppliers. In this way, the service industry will turn into something similar to the restaurants and hotels industry that is experiencing wholesale hairdos, and the unemployment rate and returns will reach zero.
On a more logical aspect, the Commissioner of the Railways asked whether the Authority could impose such restrictions, and continued that they did not even know how to impose them.
Conflict only is not intended to oppose OPEC for the sake of opponents. Some opponents indicate that those who want to impose such restrictions want it for selfish reasons, including the inability of other companies to fulfill their contractual obligations.
From Enterprise Products, CEO Jim Tigo said supporters of those cuts may be asking the government for an executive order to cancel their contracts.
In other words, as happened with China at the beginning of the Corona crisis, and receiving shipments of natural gas that were contracted to, it declares a state of “force majeure” or what they call “the Lord’s order” according to which contracts become null and void, without any conditions, because the events are out of control. And any similar production restrictions would allow American companies to declare a force majeure.
From the start, and even before the OPEC meeting, Pioneer Resources (NYSE: PXD) and Parsley Energy were among the largest companies calling for production cuts, and they wanted to join OPEC + countries. Now, those companies are calling for the Texas Railroad to impose restrictions, or the alternative would be long-term damage to industry and the economy.
Opponents ask: Is reduction or production restrictions a solution to the problem? This question came from Tigo, after two hours of marathon negotiations. Corona’s crisis surrounded US oil companies, and took them by surprise, but these producers would like to fulfill their contracts with pipeline networks, warehouse operators, hydraulic fracturing wells, and rights-contracting contractors.
Pioneer is one of the strongest oil companies in the United States, as it does not suffer from the risk of bankruptcy as the small producers. Its CEO Scott Sheffield made it very clear that the budget is robust, and the company’s hedging program is very effective.
As for Parsley Energy, she believes that the reduction contributes to supporting the oil industry and natural gas in the United States, contributes to saving jobs, supports national security, and maintains the Texas miracle, according to CEO Matt Gallagher, in an email he sent to Bloomberg.
As for the CEO of Marathon Oil, Tillman, he sees any unfair restrictions for companies in other states, because it forces them to reduce their production from oil fields, which may be more profitable than any other parts of their portfolios.
Tillman describes the reduction claims as claims by a minority, which contribute to the abolition of any consensus, or an overwhelming majority of operators, and their motivations can be explained only as impartial, based solely on the interests of their companies, and opposes any support to the broader industry.
Sheffield, the head of the Pioneer, who agrees to the cut, believes that forced restrictions will prevent the collapse of large sectors of the industry. With these cuts, they can contribute to OPEC ++ cuts, consisting of 20 countries, to support global industry.
Precedent of its kind
Opponents see these claims as precedent of their kind, and they will destroy the oil industry.
The solution, says Tillman, is not to treat the symptoms of economic corona, but to cure the disease itself, without forcing us to abandon the principles of our free market that have created American energy sufficiency.
The giant, Exxon, and Chevron are strongly opposed to those cuts. They rejected any proposal even in the period of pre-OPEC negotiations. The giants want to get the kids out of the market, to take their full stake and get out of the crisis stronger, because of their mighty budget.
As for Shephelid, he says that 80% of the US shale oil industry will go bankrupt. American oil stores will not accommodate this production surplus, forcing drilling companies to close wells.