Last week, President Trump tweeted that he had brokered an agreement between Russia and Saudi Arabia to cut 10 million barrels a day of world oil output, with hopes it might possibly be a 15 million bpd cut. Prospects for a deal sent oil futures prices soaring — up more than 24%. That move came only three days after oil touched its lowest price since 2002.
The topsy-turvy oil market will continue as long as the world is flooded with oil. The postponement of Monday’s OPEC+ meeting to Thursday will be read by commodity traders as a sell signal. Every day of delay adds 20-25 mmb/d of oil to global inventories, depressing oil prices further.
Oil traders had hoped for positive news from Friday’s White House meeting of oil executives with President Trump, but no actions were announced. Ideas such as tariffs on imported oil, banning oil imports, suspending the Jones Act to enable domestic oil to move to East Coast refiners, and pro-rationing domestic output have been discussed. Is it imaginable that the U.S. would team up with Saudi Arabia and Russia to cut production to lift oil prices? Stranger things have happened.
Another idea floated in the past few days has the federal government shutting down Gulf of Mexico production in response to offshore workers testing positive for the coronavirus. Both BP plc and Chevron Corp. have indicated they have offshore employees who have tested positive for Covid-19. In recent days, the Bureau of Safety and Environmental Enforcement (BSEE) has suspended most inspections and barred flights for inspections in all but one of its offshore districts over concern about exposure of inspectors to the virus.
With worker safety as the backdrop, the government might order the shutdown of offshore production in federal waters. While this might be seen as tacit cooperation OPEC+ to shrink global output and lift oil prices, the rationale would be safety. According to January data (latest available) from the Energy Information Administration, federal Gulf of Mexico oil production averaged 1.98 mmb/d, or 15.5% of the nation’s 12.74 mmb/d of output. Such a production cut, while likely to be challenged by producers and buyers, could help motivate Russia and Saudi Arabia to agree to large output reductions to stem falling oil prices. Higher oil prices might help prevent the shutdown in onshore petroleum activity where more workers are in jeopardy of losing jobs than in the Gulf. As of April 3, the Baker Hughes rig count listed 18 drilling rigs working offshore, versus 646 onshore.
Such an audacious idea has merit if the fewer number of workers and companies in the Gulf can be protected, rather than allowing the entire domestic petroleum industry to be devastated. While the shutdown of the Gulf following the Macondo accident in 2010 was designed as punishment for the industry, a health safety shutdown can be sold as the price to be paid for the greater good of protecting the rest of the petroleum industry. Not popular, but maybe necessary.