The US government buying petroleum is unlikely to assuage US oil prices, unless Saudi Arabia or Russia also scale back production
American oil producers are slashing their budgets for new operations for the rest of this year, which means far fewer new rigs, a painful downturn for dozens of oil-field services companies and the certainty of layoffs, from Texas to North Dakota.
Worldwide, the coronavirus pandemic has kneecapped the petroleum business, sparking a price war that the Saudis launched last weekend against the Russians, each side promising to pump more oil even as the disease causes demand to tumble. US companies are directly in the line of fire of what Goldman Sachs analysts call “a swift and violent rebalancing.”
On Friday, President Donald Trump announced a plan to buy 90 million barrels of oil to be stored in the government’s Strategic Petroleum Reserve, in a bid to prop up prices and confidence as well. But it’s unlikely to change the trajectory of a week’s worth of furious calculations by executives and analysts as they look at the year ahead.
It was only last Saturday that the Saudis announced they would raise their output by several hundred thousand barrels a day, sending the price crashing downward most of this week before showing signs of life on Friday.
US oil producers – slow to move when the Saudis launched an earlier price war five years ago, uncertain of the Saudi commitment – showed no such hesitation this week.
On Monday, Claudio Galimberti, an analyst with S&P Global Platts, predicted that “March and April demand would be brutally curtailed.” In a worst-case scenario, the firm said, there could be a 950,000 barrel-a-day decrease in global demand. By Friday, Goldman Sachs was predicting that in any scenario the falloff in American production alone would be a million barrels.
In between those two predictions, a Goldman Sachs study released on Friday showed, American firms moved to cut capital spending by 30 percent. Leading the way were such companies as Occidental Petroleum, Apache Corp., Marathon Oil, Continental Resources, Oasis and Ovintiv.
But the slowdown in oil production will significantly lag the downturn in demand. Those rigs that are currently operating will generally keep pumping. The Goldman Sachs study suggests that the biggest declines in production will occur at the end of this year and the beginning of next, primarily in the Bakken region of the northern Plains and in the Eagle Ford fields of South Texas. And they are expected to continue on into the second half of 2021.
That suggests a loss of jobs and income for all the companies that rely on oil production – from suppliers to field servicers to truckers to railroads to trailer camp operators to diners – that could extend onward for months to come.
About 90,000 workers depend on the oil business in North Dakota, said Ron Ness, head of the North Dakota Petroleum Council – 35,000 directly and 55,000 in indirect jobs that wouldn’t exist without the industry.