As a freeze-frame of the US presidential election, and the key role the energy industry will play when voters get to the polls on Nov. 3, President Donald Trump’s speech in Texas was a fascinating case study.
You have to give it to him for theatrical pizzazz. In the heart of the Texas shale industry, he stood in front of a pile of oil barrels draped in American and Texan flags as well as the corporate logo of Double Eagle Energy, one of the biggest companies operating in the Permian basin.
“We were very close to losing a very powerful, great industry, and now we’re back and we’re just going to keep expanding,” Trump said to loud cheers. He had a message to his political opponents: “Don’t mess with Texas.” The problem he faces is that by any conventional assessment of the US oil industry, it is still far off the dominance it attained last year as the world’s biggest oil exporter. The COVID-19 pandemic hit the entire energy world badly, but the US, and especially Texas, suffered especially gravely.
When West Texas Intermediate (WTI), the US benchmark, neared a price of minus $40 per barrel on Black Monday, April 20, whole swathes of the US industry became uneconomic at a stroke. American oil output bottomed out at 9.7 million barrels per day (bpd) in June, compared with 13 million bpd in March before the OPEC+ agreement briefly fell apart and the full effects of the pandemic became apparent. The number of operating rigs earlier this month stood at around 250, compared with
800 in March. Some of the best-known names in the US shale business, including pioneer Chesapeake Energy, have gone bankrupt. Since that low last month, there has been something of a recovery, with estimates that 10.9 million bpd of oil are now being produced in the US. But it is still way off the global energy dominance that Trump would like to see.
The reason it has recovered at all is because of the historic OPEC+ cuts, orchestrated by Saudi Arabia and Russia, that ended the brief price war of March and April. Trump gave thanks to the two leaders of the oil alliance, and bizarrely also to Mexico, which did little except confuse and delay the deal.
Since then, WTI has recovered to around $40 per barrel, with Brent, the global benchmark, nudging the $45 level. Trump’s problem is that while this is a welcome turnaround, it is not enough. Below $50 per barrel, American oil will simply not “keep expanding.”
There is little the Americans can do about it. The oil price is being set by two factors totally outside their control. On the one hand, there is the rate of demand recovery from the shock of pandemic lockdowns. This is at best uneven, with no sign of the V-shaped recovery some had predicted for later this year. The best that can probably be hoped for is a more gradual U-shaped recovery, punctuated by further lockdowns.
On the other hand, there is the supply side of the equation, which is being set by OPEC+. The new regime at the 23-member alliance has been ruthlessly efficient in enforcing compliance to the new output levels. Just last week, Iraq — one of the laggards in meeting compliance agreements — said it was already 100 percent in line with its obligations, contrary to reports, and would stick by commitments to compensate for past shortfalls.
OPEC+ is pleased with the progress it has made since April, and is probably quite happy to keep the oil price around $45 until the demand outlook clarifies. It is playing a long game, and one that does not suit US shale.
The pandemic/oil nexus is at its most apparent in Texas. Rising infection rates have slowed re-openings, which in turn has reduced demand for oil for transport and industry. Trump’s election opponent, Democrat Joe Biden, has been the beneficiary, leading the president in the polls in a state that has been Republican for decades. Despite all Trump’s election rhetoric in shale country, he must be worried that come November, Texas will mess with him.
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