Released April 22, 2020 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Against the backdrop of an
The downward price volatility was partly the result of Monday being the last day of trading for the WTI May futures contract, where positions had to be closed out. Analysts attributed the extraordinary price decline to the absence of storage capacity to take crude oil. On Monday, producers had to pay pipelines and refineries to take crude oil. WTI May futures closed at negative $37.63 per barrel, a swing of about $49 per barrel from Monday's opening price of about $11 per barrel.
On Tuesday, the first day of the June contract, WTI prices shot up more than $40 per barrel, reaching about $5 per barrel by midday. By contrast, WTI sold for about $46 per barrel in early March, before both the Saudi-Russian price war and the full effects of the COVID-19 pandemic were known.
As one nation after another has shut down its economy in response to the COVID-19 pandemic, global demand for refined petroleum products evaporated as people stopped driving, factories stopped operating and planes cut back sharply on flights.
Analysts estimate that as many as 30 million BBL/d of demand--roughly 30% of demand--has disappeared. With most economies at a standstill, producers and pipelines have been storing crude, including in offshore vessels, but available storage capacity is rapidly dwindling.
Last week, the RRC, which regulates the Texas oil industry, held a 10-hour meeting to hear from oil companies, analysts and other stakeholders about whether the panel should enact a rule limiting production because crude oil was being wasted. State law defined waste as production in excess of demand and storage. For more on that meeting, see April 15, 2020, article - Oil Production Cuts: Proponents, Opponents Clash at Texas Panel.
At yesterday's meeting, RRC Commissioner Ryan Sitton said he had prepared a proposal to temporarily reduce production by 1 million BBL/d, contingent on other countries cutting about 4 million BBL/d. But when it became clear that the other two members of the panel were opposed, he didn't bring his measure to a vote.
The rapid decline in crude-oil process threatens U.S. energy independence, Sitton said at yesterday's virtual meeting: "Inaction on our part is unacceptable. I believe we need to step up and do things to protect our energy independence."
He acknowledged the prospect of production cuts made the industry and the panel uncomfortable, as consensus was preferred. "This is much bigger than the oil industry," Sitton said in the futile attempt to build support for his proposal.
RRC Chairman Wayne Christian began yesterday's meeting with a prayer. Following that, he acknowledged this was a "dark time" for the industry and the economy. He announced the formation of a blue-ribbon task force on oil and economic recovery. The group would have a wide mandate, he said, adding "everything should be on the table during this downturn." Christian also said he had been consulting with Texas' two U.S. senators, as well as officials from Oklahoma, North Dakota and Canada, to coordinate actions, recognizing that action by one state or province would have little effect on the global oil market.
"This is a challenging time for us, not a time to be timid," the chair continued. "This is a war on our industry by a foreign adversary. But we need to get correct information (including legal opinions) before we move alone and by ourselves." A go-it-alone approach was less desirable than actions coordinated with other parties.
Commissioner Christi Craddick, the only lawyer among the panel's three commissioners, outlined her concerns about moving before the state attorney general and the commission's legal staff have had a chance to review any proposed order. Speaking about any RRC order cutting production, Craddick said: "This is going to go to the courthouse and we need to really think about that. Anything we do will probably end up in court, and spending four to six years in litigation doesn't help anyone if we don't do this right."
The commission's next scheduled meeting is May 5, and there is a chance that the legal review can be completed by then, potentially enabling the RRC to again consider Commissioner Sitton's proposal.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
The downward price volatility was partly the result of Monday being the last day of trading for the WTI May futures contract, where positions had to be closed out. Analysts attributed the extraordinary price decline to the absence of storage capacity to take crude oil. On Monday, producers had to pay pipelines and refineries to take crude oil. WTI May futures closed at negative $37.63 per barrel, a swing of about $49 per barrel from Monday's opening price of about $11 per barrel.
On Tuesday, the first day of the June contract, WTI prices shot up more than $40 per barrel, reaching about $5 per barrel by midday. By contrast, WTI sold for about $46 per barrel in early March, before both the Saudi-Russian price war and the full effects of the COVID-19 pandemic were known.
As one nation after another has shut down its economy in response to the COVID-19 pandemic, global demand for refined petroleum products evaporated as people stopped driving, factories stopped operating and planes cut back sharply on flights.
Analysts estimate that as many as 30 million BBL/d of demand--roughly 30% of demand--has disappeared. With most economies at a standstill, producers and pipelines have been storing crude, including in offshore vessels, but available storage capacity is rapidly dwindling.
Last week, the RRC, which regulates the Texas oil industry, held a 10-hour meeting to hear from oil companies, analysts and other stakeholders about whether the panel should enact a rule limiting production because crude oil was being wasted. State law defined waste as production in excess of demand and storage. For more on that meeting, see April 15, 2020, article - Oil Production Cuts: Proponents, Opponents Clash at Texas Panel.
At yesterday's meeting, RRC Commissioner Ryan Sitton said he had prepared a proposal to temporarily reduce production by 1 million BBL/d, contingent on other countries cutting about 4 million BBL/d. But when it became clear that the other two members of the panel were opposed, he didn't bring his measure to a vote.
The rapid decline in crude-oil process threatens U.S. energy independence, Sitton said at yesterday's virtual meeting: "Inaction on our part is unacceptable. I believe we need to step up and do things to protect our energy independence."
He acknowledged the prospect of production cuts made the industry and the panel uncomfortable, as consensus was preferred. "This is much bigger than the oil industry," Sitton said in the futile attempt to build support for his proposal.
RRC Chairman Wayne Christian began yesterday's meeting with a prayer. Following that, he acknowledged this was a "dark time" for the industry and the economy. He announced the formation of a blue-ribbon task force on oil and economic recovery. The group would have a wide mandate, he said, adding "everything should be on the table during this downturn." Christian also said he had been consulting with Texas' two U.S. senators, as well as officials from Oklahoma, North Dakota and Canada, to coordinate actions, recognizing that action by one state or province would have little effect on the global oil market.
"This is a challenging time for us, not a time to be timid," the chair continued. "This is a war on our industry by a foreign adversary. But we need to get correct information (including legal opinions) before we move alone and by ourselves." A go-it-alone approach was less desirable than actions coordinated with other parties.
Commissioner Christi Craddick, the only lawyer among the panel's three commissioners, outlined her concerns about moving before the state attorney general and the commission's legal staff have had a chance to review any proposed order. Speaking about any RRC order cutting production, Craddick said: "This is going to go to the courthouse and we need to really think about that. Anything we do will probably end up in court, and spending four to six years in litigation doesn't help anyone if we don't do this right."
The commission's next scheduled meeting is May 5, and there is a chance that the legal review can be completed by then, potentially enabling the RRC to again consider Commissioner Sitton's proposal.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
