Trump’s crude output quandary

US President Donald Trump is in a campaign mode, asserting that the energy sector is back on its feet. Visiting Midland, a region deep in the heart of the western Texas oil patch, Trump underlined: “And now we’re back”. A euphoric Trump proclaimed, “and now we’re just going to keep expanding. … We did a great job.”

Not really, says CNN.

As usual in his presidency when it comes to economic matters, Trump is overly optimistic. The oil and gas industry in the Permian Basin and across the US remain anything but “OK,” CNN emphasised.

And there are reasons for CNN to be pessimistic.

The coronavirus crisis will lead to global oil demand dropping by around 8 per cent this year compared to last year, the International Monetary Fund (IMF) said in its new report.

This year, oil prices will be 41pc lower than in 2019, the IMF said in its ‘Global imbalances and the Covid-19 crisis’ external report.

The fund’s estimates for this year’s global oil demand decline are in line with other forecasters such as the International Energy Agency (IEA) and the Organisation of the Petroleum Exporting Countries. In its July Oil Market Report, the

IEA said that global oil demand was set to crash by 7.9 million barrels per day (bpd). This year, the world is expected to consume an average of 92.1m bpd of oil, compared to the typical demand of 100m bpd, the IEA said.

The IEA, however, is also cautioning that the recent rise in Covid-19 cases in parts of the world, including the US, and the reinstating of partial lockdowns in some countries are contributing to a sense of uncertainty surrounding the world’s global oil demand in 2020.

The Opec appears still more pessimistic, reporting it expects overall global oil demand to drop by 8.9m bpd in 2020, before rising by 7m bpd in 2021, when it will still be lower than demand in 2019.

And although President Trump is claiming victory, recent official US reports are pointing to the contrary saying that American oil production has registered a record monthly decrease in its output in May 2020.

Production of crude oil decreased in the United States in May 2020 by 1.99m bpd, the largest monthly decrease since at least January 1980, the US Energy Information Administration’s (EIA) reported. This decrease surpassed the previous record drop in September 2008, when Hurricanes Gustav and Ike caused production to fall by 1.03m bpd. As per the EIA, May also marks the sixth consecutive monthly decrease in the US crude oil production and is the third month since the March 2020 declaration of a national emergency concerning the Covid-19 outbreak.

Energy asset values in the US are continuing to go down. Forty publicly-traded US oil producers wrote down a collective US$48 billion worth of the value of their assets in the first quarter of 2020, the US Energy Information Administration (EIA) reported a couple of weeks back.

In sharp contrast to what President Trump is saying, CNN is painting a dismal outlook of the US energy sector, underlining that Trump’s comments about the health of the US oil sector are highly misleading. The pain is only just beginning to ripple through the industry in the form of bankruptcies and layoffs, CNN claims, as the number of oil and gas rigs in operation in the US is almost four times lower than it was a year ago. The price of oil is still 30pc lower than where it was in January, and domestic crude production is down by about 2m barrels a day from its pre-Covid peak.

The industry is not back, but is “on its back,” CNN quotes Philip Verleger, an analyst and a former senior research scholar at Yale University, as saying.

“A lot of companies have started reporting their financials, and they’re just horrible,” Verleger said, adding that “this industry is going to shrink and going to shrink dramatically unless global prices go up.”

The number of rigs operating in the US is also abysmally low, pointing to the prevalent situation in the sector. As per a Baker Hughes report on Friday, there were only 247 active drill rigs operating in the US, down from 942 rigs at the same time last year.

In the Permian Basin, where Trump announced victory over the oil and gas slump, the number of active rigs is down by 71pc compared to last year according to the report, CNN emphasised in its report.

The picture is not rosy. For President Trump to claim the US energy sector is back on its feet is premature, if not fully untrue.