Black Gold. Texas Tea. TxOPEC?
Posted April 16, 2020
Amid talk in Texas of production quotas (“proration”) and other extreme policies that have been suggested to address the oil demand downturn, API’s Monthly Statistical Report (MSR) shows that supply is responding in real time and that U.S. crude and refined storage capacities have some flexibility to adjust to the COVID-19 driven demand decrease – helping to alleviate the need for blanket policies or government interventions.
Notably, recent federal actions may help provide additional flexibility to the entire energy value chain. For example, the U.S. Department of Energy’s opening of crude oil storage capacity within the Strategic Petroleum Reserve (SPR) to individual companies provides much-needed flexibility. Separately, Federal Reserve measures to either purchase corporate bonds or provide loans may perform additional triage for the energy industry and across the broader economy.
Here’s what we see in API’s latest data:
- Supply response.U.S. crude oil production of 12.9 million barrels per day (mb/d) brought the first monthly decrease in March since 2010, before the U.S. energy revolution, and refineries had their lowest throughput and capacity utilization rates in five years or more.
- Demand perspective.U.S. total petroleum demand of 19.4 mb/d decreased by 0.9 mb/d (4.6%) from February and 0.8 mb/d (4.0%) compared with March 2019. Importantly, these timely survey data gathered from 90% of the natural gas and oil industry indicate demand decreased by less than many third-parties have suggested and showed lower gasoline and jet fuel deliveries, but more diesel (freight transportation).
- U.S. oil trade backslid. Net petroleum trade returned U.S. to petroleum net importer, as exports fell by more than imports. This jeopardizes U.S. progress toward energy self-sufficiency.
To be clear, oil demand in the second quarter of 2020 appears likely to be less than that in the first quarter based on measures to prevent COVID-19 transmission, but the jump-off point for the U.S. in March was relatively more stable than many anticipated based on top-down analysis and without hard data.
In the absence of data, relatively extreme views can tend to capture the most attention, and reckless policy solutions can be advanced without much regard to root causes.
By far, the highest profile example to date was the Texas Railroad Commission hearing this week to discuss potential oil production quotas and proposals by some for Texas to coordinate with OPEC, and I was privileged to address the commissioners.
I previewed API’s March data to emphasize that the point of departure appears to be better than some of the views expressed in the hearing. I also spoke to API’s detailed analysis of every producing well in Texas to back up my points.
Specifically, I gauged how production quotas might work if administered by producing field and in short found that the proration of production would cut the most from the fields, basins and operators with the greatest production. The Midland basin and Eagle Ford – their operators and royalty owners – would be disproportionately affected. And I also urged the Commission to understand that there may be long-term implications for unconventional well productivity in the state of severe proration or shut-ins.
Just as two wrongs don’t make a right, policies that are well-intentioned but misguided are unlikely to improve market conditions and could become a precarious and slippery slope, as we have seen in other recent examples, such as the province of Alberta, Canada.
Alberta thought it was implementing temporary measures to curtail its oil production at the end of 2018. But a year and half later Alberta has increased its curtailments and seen its oil trade at relatively lower prices than before its intervention.
If we avoid bad policy outcomes, it is more likely U.S. supply and demand can remain resilient as the effects of COVID-19 diminish.
The U.S. needs Texas to be prepared to ramp back up quickly, and production quotas would sell Texas and our nation short.
Again, please see our latest Monthly Statistical Report for further details, and thank you for your positive feedback on API’s data and analysis through these unprecedented times.
About The Author
Dr. R. Dean Foreman is API’s chief economist and an expert in the economics and markets for oil, natural gas and power with more than two decades of industry experience including ExxonMobil, Talisman Energy, Sasol, and Saudi Aramco in forecasting & market analysis, corporate strategic planning, and finance/risk management. He is known for knowledge of energy markets, applying advanced analytics to assess risk in these markets, and clearly and effectively communicating with management, policy makers and the media.
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