Oil Tumbles 10% Amid Texas Infighting Over Cuts, Expected Weekly Builds
-Crude prices tumbled 10% Tuesday as OPEC’s plan for deep global cuts in output ran into resistance in Texas where some drillers in the largest U.S. oil producing state balked at making more reductions than they deemed necessary.
Expectations that the government will report on Wednesday large and all-round builds in crude, gasoline and distillates stockpiles for last week also weighed on prices.
West Texas Intermediate, the New York-traded benchmark for U.S. crude, settled down $2.30, or 10.3%, at $20.11 per barrel. WTI broke below the $20 support level earlier, falling to $19.96.
Brent, the London-traded global benchmark for crude, tumbled $2.14, or 6.7%, to settle at $29.60.
“The Texas story by itself doesn’t change the OPEC status quo on cuts, but it’s giving ideas on how the picture could change if similar narratives start popping up across the U.S.,” said John Kilduff, founding partner at New York energy hedge fund Again Capital.
OPEC and other oil producing countries agreed at the weekend to cut nearly 10 million barrels per day of supply to mitigate some 30 million bpd in demand that analysts estimate has been lost to the Covid-19 pandemic.
While the United States is participating in that plan, officials say the U.S. cuts will be voluntary and market-determined. That ran into a snag in Houston where Texas energy regulators responding to a call from a couple of drillers for a mandate on output cuts faced resistance from others who said such moves will bring them more hardship.
Pioneer Natural Resources (NYSE:PXD) Chief Executive Scott Sheffield, who has asked regulator Texas Railroad Commission (TRC) to enforce deeper cuts, warned of $3 to $10 per barrel prices in the next several weeks, unless the commission acted decisively.
“This is probably going to be worse than ‘86,” Sheffield said. “Demand is not going to come roaring back.”
But some companies argued that they were already cutting spending by as much as 50%.
“I would argue that among global producers, the U.S. has acted first and has acted quite strongly,” said Lee Tillman, CEO of Marathon Oil (NYSE:MRO). “The bottom line is we’re already cutting and cutting deeply.”
The TRC is to make a decision later in the day. At least two of the three-member panel at the commission have to vote in favor of deeper cuts, and only one is now on the side of those that want stronger action.
On weekly stockpiles data, the Energy Information Administration is expected to report that U.S. crude stockpiles rose by 11.6 million barrels last week, after having risen 30.6 million barrels over the past three weeks.
Gasoline stockpiles are expected to have gained by 6.8 million barrels last week, after a net build of 16.5 million barrels over three weeks.
Distillates inventories are forecast to have risen by 1.2 million barrels last week, against a net drop of 2.4 million barrels over the past three weeks.