Oil: When demand and supply shocks collide

Oil markets are suffering from an unprecedented situation of simultaneous demand and supply shocks.

“We’re in uncharted territory,” said Scott Lauermann, an issues management consultant with the American Petroleum Institute, a trade group that represents drillers.

The supply shock comes from a glut in the oil markets resulting from Saudi Arabia’s decision to open its oil spigots after it failed to get a consensus from the Organization of Petroleum Exporting Countries on managing output.  The attempted agreement was torpedoed by Russia, and Saudi Arabia’s leader, Mohammed bin Salman, known as MBS, decided to punish Russia by opening the oil taps. 

The move also targets United States shale oil producers, however, by causing a massive price drop of about 50% in the past few months. The glut has caused freezes in some parts of the oil supply line, with reports of supertankers being used as floating warehouses. Lauermann said refiners are switching from winter to summer blends, and some are concerned that the system might not be able to clear winter stocks left over from what has been a mild winter overall in the U.S. The East Coast’s Colonial pipeline, he said, has reduced its capacity.

The demand shock comes from the ongoing coronavirus crisis, which has led to lockdown orders around the globe, drastically reducing driving and industrial activity in some places, and thus demand for oil and gas. A recently released report by IHS Markit estimates that demand for gasoline will have plunged 30% by April.

Diplomatic efforts

Saudi Arabia’s move has not gone unnoticed in the White House. President Donald Trump has been one of MBS’s strongest supporters, even in the face of strong world criticism of some of the Saudi leader’s actions. News outlets have reported that the State Department has sent representatives to Saudi Arabia to try to get the Saudi leader to back off his oversupply strategy.

API and other oil industry groups have sent letters of concern to the White House about the situation, saying that while they support diplomatic efforts to resolve the situation with Saudi Arabia, they remain opposed to tariffs, cartels or other government efforts to manage markets.

‘No bailout,’ but Jones Act relief?

The American Exploration and Production Council (ACPX) another trade group that represents 26 of the largest American oil companies, sent a letter March 16 to leaders of the House and Senate stressing that the industry was not looking for a bailout.

“We want to be clear: Our industry is not seeking a bailout from the federal government.  This goes against the business-minded, and entrepreneurial spirits of our members, who believe in the free market.  What we are seeking is a restoration of a functioning, stable, global market for oil, which removes artificial manipulation of the global marketplace,” said AXPC CEO Anne Bradbury. 

Nevertheless, the industry did use the week’s events as an excuse to ask for a temporary waiver from the Jones Act, which the larger oil companies have long opposed. The request was remarkable because the industry usually uses temporary shortages as their reason, such as in the wake of Hurricane Katrina, whereas oil markets are now flooded. “Oil markets are very well supplied, and there are no disruptions of concern,” said Lauermann.

The American Waterways Operators, America’s Maritime Partnership and other maritime groups appear to have successfully headed off the effort. The AMP released a letter in response that said, “This is an opportunistic effort by those who want to use foreign ships to advance their own economic interests at the expense of American workers who are doing everything in their power to keep this economy moving. At a time of American crisis and uncertainty, a waiver to the Jones Act would only open our borders and markets to foreign shipping companies with foreign crews that pose an added threat to the safety and security of our nation’s health." 

David Murray can be reached at [email protected].