Texas, OPEC & Russia: Strange Bedfellows?

03/20/2020 12:42 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

There are reports that Texas oil regulators may enter discussion regarding production cuts with OPEC and Russia, reports Phil Flynn.

Today is the first day of spring, and yesterday crude rebound gave hope that the darkness that has engulfed the energy sector may have dreams of brighter days ahead. That is going to be needed because the energy industry was blindsided with a double sucker punch from the record demand destruction from the Coronavirus as well as an ill-timed price war between Russia and the Saudis. Yet rising hopes for treatment of the Coronavirus may be close, a significant 77 million barrels of oil buy for the SPR, as well as massive stimulus from Congress, is raising hopes there will be light someday after this darkness. There is also talk that President Trump and his administration will pressure Russia and Saudi Arabia to end the price war.

The Kremlin says they will not give into Saudi blackmail, but let's face it, if the United States hits them hard with sanctions they may look to relent. Some reports say that Russian President Putin said to open up a dialog with Saudi Arabia. While they dig in, the market is sensing a potential truce in the oil price war. We will find out if they are right.

Yet U.S. energy is taking a significant hit. Even though there is hope around the corner, massive layoffs and a cut to spending and dividends are going to be the norm. There is also some talk of conspiracy to get the price higher. Enter a report about The Railroad Commission of Texas (RRC) - better known as the Texas railroad commission - that has its roots in the late rough and tumble days of Texas in the1890s.

Storied names like Governor James S. Hogg, and Commissioner John H Reagan that ruled the railroads and later the booming Texas oil industry come from this illustrious time. They set the rates and the rules and how they would classify freight. They took over oil regulation, and when Texas was the leading producer in the world, set prices for the world and regulated output. This rough and tumble group colluded and many-times set a price advantage that would benefit Texas. That ticked off some Middle Eastern producers and helped inspire them to nationalize oil companies and set up their own cartel called OPEC. Texas lost their power when OPEC took over and saw Texas production decline.

The Wall Street Journal says that Texas has a hankering for the old days. The Journal wrote, “Texas regulators are considering curtailing oil production in America’s largest oil-producing state, something they haven’t done in decades, people familiar with the matter said.” 

Several oil executives have reached out to members of the Texas Railroad Commission, which regulates the industry, requesting relief following an oil-price crash, the people said. U.S. benchmark oil closed around $25 a barrel Thursday. Texas, which hasn’t limited production since the 1970s, was a model for OPEC, which has sought to control world-wide oil prices in recent decades.

It is unclear whether regulators will ultimately act to curtail production, but staffers are examining what would be required in such an event, the people said.”

What is also is unclear as whether this move would be legal. This is not the 1890’s or even the 1970’s. Yet these are extraordinary times. Yet I think President Trump would not allow that because as he says he is for low prices and the guy behind the steering wheel. The Texas Tribune writes, “There would be "some natural concerns" among some in the industry to a dramatic oil production cut, including ensuring low-volume wells, those that produce no more than 15 barrels per day, are exempt from any cut, said economist Karr Ingham of the Texas Alliance of Energy Producers.”

There is some speculation that Texas, OPEC and Russia may agree to an across the board production cut. The Texas Tribune says that, "Oil production revenues made up about 6.1% of the Texas state tax revenues in 2018, according to the Texas comptroller's office. But the industry helps power the state's economy, which is likely to take more of a beating since Gov. Greg Abbott.”

S&P global writes that, “U.S. Senator Chuck Grassley (R Iowa), urged the Trump administration Thursday to help the U.S. biofuel industry weather plunging fuel prices and demand, just as the White House was seen as supporting domestic oil producers by filling up the government's emergency crude stockpile.”

From a technical perspective oil and products look like the lows are in. Fundamentals a different story. We still see massive oversupply. Yet with U.S. production falling and hope that this Coronavirus nightmare may end and massive stimulus, there are very bright days ahead. Hang in. Keep the faith. Prayers for everyone impacted by this terrible virus. Better days ahead.

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