US President Donald Trump scored what he termed last week as the “oil deal of the century” by convincing warring OPEC+ members to strike a major production cut deal to shore up prices that are now plumbing 20-year lows.
What he didn’t announce as part of the deal, however, was the impending decline of US shale oil producers and the likelihood that the US would likely soon cede its recently secured position as the world’s top oil producer. Those declines are already underway.
The US Energy Information Administration (EIA) said on April 14 that US shale output is expected to drop year on year by 194,000 barrels per day (bpd) in April to 8.7 million bpd, followed in May by a 183,000 bpd decline, the lowest level in four months and sixth straight month of declines.
Output at all US shale basins are expected to decline, including at the prolific Permian Basin in Texas and New Mexico, which will bear the brunt of the production shut downs.
Permian production is expected to drop by 86,500 bpd in April, the most since December 2015 when another global oil price decline forced numerous US shale producers into bankruptcy.
In May, production losses in the Permian will total some 76,000 bpd, the EIA said, dropping total production at the basin to 4.52 million bpd.
To put these figures into context, total US oil production hit a then-new record of 12.9 million bpd in November 2019, with shale accounting for 9.1 million bpd of that production.
Crude oil production in the US reached a new record high of 13.1 million bpd for the week ending February 28 this year.
Russia and Saudi Arabia, the world’s top two crude oil exporters, along with other OPEC+ members, agreed to remove nearly 10 million bpd from global markets, as per the terms of the new production cut deal.
The deal, announced last weekend (April 11), comes amid the largest oil demand destruction in history due to the economic devastation wrought by the Covid-19 pandemic. But Trump scored more than oil war wins.
By working hand-in-hand with Russian President Vladimir Putin, he also arguably opened the door for better US-Russian relations after a five-year protracted struggle over a host of contentious issues that have driven Moscow closer to Beijing.
Trump saved the hard-fought deal after Mexico waffled by agreeing that the US would shoulder part of Mexico’s 400,000 bpd worth of production cuts. Mexico is not an OPEC member, but since the 1980s usually attends its meetings as an observer.
Instead of OPEC+ trimming 10 million bpd as originally planned, its members will instead cut 9.7 million bpd in May and June, representing about a tenth of global production.
The cuts represent more than twice those agreed to in an OPEC production trimming deal to support prices during the 2008-9 global economic crisis.
Production cuts are scheduled to drop further to some 8 million bpd from July to December 2020, then fall further to 5.6 million bpd from January 2021 through April 2022.
Specific demand projections were not announced as part of the deal. However, in March, OPEC+ revised down its global demand projection for 2020 to a meager 60,000 bpd over 2019 consumption, a reduction of 920,000 bpd from its previous forecast.
OPEC president for a day
Trump’s diplomacy could give the president a boost with US voters, though it’s just as likely by election time in November the deal will be forgotten as he tries to ward off job losses, including in the oil industry, and the economic devastation caused by the Covid-19 pandemic.
He also reportedly gained personal clout among global oil industry heavies, particularly in Saudi Arabia and Russia, which will likely prove to be as much antagonists as allies in sticking to the terms of the production cut deal.
Trump’s intervention earned him certain praise among industry analysts.
“Under the watchful eye of Donald Trump, Saudi Arabia seemingly had to relax their position that everyone cuts by equal proportion,” said Helima Croft at RBC Capital Markets. “Trump essentially became the de facto OPEC president.”
Though Trump did not divulge the exact details of promised US production cuts, he surely knew that US shale producers would take a severe hit as record low prices continue to trend well below their breakeven points.
Even the Texas Railroad Commission, which regulates oil production in the state, recently projected that anywhere between 3-4 million bpd of US production could go offline this year due to low prices and the impact of Covid-19 driven demand destruction.
Last year, the state accounted for 41% of the nation’s crude oil production and 25% of its marketed natural gas production.
Trump’s maneuverings to actually increase global oil prices is the first for a US president, at least in modern history.
In the past, higher oil prices equaled economic pain for gas-guzzling Americans, spawning a decades-long grass roots antipathy towards OPEC and Saudi Arabia.
Now, with the US recently emerging as the world’s largest global oil producer and third largest liquified natural gas (LNG) exporter, the tables have turned.
Low oil prices no longer represent bragging rights for a US president, but instead threaten not only the country’s massive energy sector but it’s overall economy – and thus the national leader’s political fortunes.
Lower prices and a corresponding loss in production will eventually cause the US to cede its top oil production first to Russia, currently the world’s second largest oil producer, and then likely to Saudi Arabia based on projections made assuming the new deal holds through 2022.
Not only will the US give up its top production slot, but it will lose market share, especially in the Asia-Pacific region, just as US oil exporters were making inroads into what were the world’s top growth markets before the Covid-19 pandemic struck.
Though Saudi Arabia was finally persuaded to join Russia and other producers in the historic oil cut deal, the kingdom remains a fierce, if not unpredictable, competitor in both protecting and trying to increase its oil market share in Asia including in China, the world’s largest crude oil importer.
The de facto OPEC+ leader slashed its official selling prices to Asian customers for May by larger-than-expected margins this week, according to news agency reports.
While that move may come as a surprise to many observers, it’s arguably business-as-usual since Saudi Arabia has historically, and now increasingly, faces stiff competition from not only Russia but other OPEC+ members for market share in the Asia-Pacific region.
Riyadh’s aggressive move can also be seen as a pushback against so-called non-OPEC+ producers, including the US. In recent years, those non-cartel members have carved out their own particular niches in the region at the Saudi’s expense and are not required to abide by its agreed production cuts.
Looking ahead, the pandemic’s economic impact on global oil markets generally and US producers in particular could bring long-term systemic changes to the industry.
Some analysts speculate it could lead to the removal of US anti-trust laws which prohibit American oil producers from working together on, or even discussing, production and prices.
Moreover, if US producers are able to work together, both domestically and internationally, it could usher in a new era of not only OPEC or OPEC+, but a new OPEC++ group of producers that includes the US.