US to send envoy to Saudi Arabia as Texas suggests oil output cut

Oil prices have lost more than half their value in the last two weeks as Saudi Arabia and Russia kicked off a price war.

oil and natural gas production area near Odessa, Texas, U.S
A pump jack operates in the Permian Basin oil and natural gas production area near Odessa, Texas, in the United States [File: Nick Oxford/Reuters]

The administration of United States President Donald Trump plans to send a special energy representative to Saudi Arabia, officials said on Friday. The White House is scrambling to respond to the global oil price crash as a regulator from the top US oil-producing state took the rare step of considering output cuts to help stabilise markets.

Oil prices have lost more than half their value in the last two weeks as Saudi Arabia and Russia kicked off a price war, and the coronavirus pandemic destroyed demand.

The crash has shocked the oil industry as a pact among OPEC and non-OPEC producers to cooperate imploded, triggering a production free-for-all. Texas regulators are considering the unusual step of intervening to curb output for the first time in decades, while the US is scrambling to negotiate with Saudi Arabia, which has unleashed production after years of touting its role as a stabilising force for markets.

Saudi Arabia and Russia are locked in a war for global oil market share after their three-year deal to restrain output collapsed this month. The kingdom has vowed to increase production to a record 12.3 million barrels per day and has chartered numerous tankers to ship oil around the world, pushing prices to near 20-year lows this week.

US officials believe Saudi Arabia’s move to flood oil markets compounds the global economic crash at a time of a crisis caused by the pandemic.

A senior US Energy Department official will be sent to Riyadh for months to work closely with Department of State officials and the existing energy attache, the senior US officials told Reuters News Agency, on the condition of anonymity.

Trump administration officials said Saudi Arabia has, for decades, been a steadfast leader of stability in the global oil market. The energy representative would help the countries return to a path of stability, they said.

The price crash is also devastating to US oil producers, some of which have already begun putting employees on leave.

The hope is that Trump could negotiate with Saudi Arabia and Russia and convince them to match cuts with a similar cut in production in Texas, said Ryan Sitton, a commissioner with the Texas Railroad Commission, the body that regulates the state’s oil and gas industry.

Sitton said production limits could be implemented quickly, though no one who works at the agency was around the last time the state limited production in the early 1970s.

“We need to take the time to hear from everybody,” he said, adding that he was not yet advocating for the cuts. “[But] if we can help [Trump) get a deal done, then I think that’s when we do something.”

Sitton said in a tweet that he spoke with OPEC Secretary-General Mohammad Barkindo about an international deal “to ensure economic stability as we recover from” the coronavirus outbreak. Sitton said Barkindo was “kind enough to invite me to the next OPEC meeting in June”.

Barkindo told Reuters that he and Sitton discussed their “perspective on current developments and the possibility of future cooperation” in a teleconference. Barkindo and OPEC ministers have, in the past, met with shale-industry executives at annual conferences.

Frank Fannon, the US assistant secretary of state for energy resources, said that to his knowledge, the federal government does not have the ability to restrict the Texas regulator from any work with OPEC to cut production. “Those are wholly within state matters … from a federal level we have no ongoing engagements with OPEC, it’s a cartel,” Fannon told reporters late on Friday in a teleconference.

US industry unmoved

Some US industry representatives were sceptical that Texas should intervene in the market. US oil producers have long resisted such a move, and the industry’s largest trade association did not sound convinced Friday, either.

“Our view is simple. Quotas are bad,” said Frank Macchiarola, senior vice president of policy, economics and regulatory affairs at the American Petroleum Institute. “They’ve been proven ineffective and harmful. There’s no reason during this time to try to imitate OPEC.”

In the last several years, shale operators using the innovative hydraulic fracturing, or fracking, technique, have boosted US oil output to nearly 13 million barrels per day, making it the world’s largest producer. Since 2016, as OPEC restrained production, the US has taken market share from Saudi Arabia, Russia, and other nations.

Russia has been slower to come on board with OPEC’s continued efforts to bolster prices, and the country’s largest oil producer, Rosneft, has been an opponent of the deal with OPEC to cut supply. Units of that company, and its managers, were recently sanctioned by the US due to its trade relationship with Venezuela.

Trump administration officials will continue to reduce global oil output with sanctions on what the officials called bad actors in Iran and Venezuela, both of which are OPEC members, and their shipping networks, the officials said. To the extent that Russia is involved in marketing Venezuelan oil, it will be sanctioned, the officials said.

Source: Reuters