No Promise Seems to Suspend Energy Market Freefall

President Donald Trump flips through a stack of papers as he speaks about the coronavirus Monday in the White House Press Briefing Room. (AP Photo/Alex Brandon)

MANHATTAN (CN) — Record-breaking drops in oil futures spurred investors to continue their sell-off Tuesday, while lawmakers are unsure how to react. 

“We will never let the great U.S. Oil & Gas Industry down,” President Donald Trump tweeted Tuesday. “I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!”

The previous evening, after prices per barrel of the West Texas Intermediate had plummeted more than 300%, Trump had suggested adding 75 million barrels to the U.S. Strategic Petroleum Reserve. 

Monday’s plunge marked the first time in history the market had dipped below zero, reflecting the lack of storage for crude. It only got worse Tuesday as futures for June’s contract fell to about $11 a barrel, a freefall of more than 40%.

Neither the markets nor experts seemed heartened by the promise of federal intervention.

“I don’t think we need to bail out oil companies,” said Severin Borenstein, faculty director of The Energy Institute at Berkeley’s Haas School of Business.

Borenstein noted the industry will see many bankruptcies, but not the liquidation kind. “It is not a policy problem, it is a market problem,” he said, noting most of the industry’s jobs are in drilling and exploration, which are already gone as companies have abandoned new wells.

By bailing out oil companies, Borenstein said, “we’re not saving jobs, we’re saving shareholder value.”

On Wall Street, the Dow Jones Industrial Average dropped about 630 points Tuesday, a 2.6% loss. The S&P 500 and Nasdaq had even greater percentage decreases, at 3% and 3.4%, respectively.  

DataTrek Research co-founder Nick Colas warned investors early Tuesday the energy market has not hit its bottom. “Until people start driving to work again and flying/driving to recreational spots, oil will remain under pressure and the energy industry will have to face its structural problems of overcapacity and generally fragile balance sheets,” Colas wrote in an investor note.

Goldman Sachs analysts predicted the volatility of oil markets will continue for the next few weeks, with the market “forced to balance before June,” according to an investor note Monday.

Prices of Brent crude, typically used as a benchmark for international oil supply, also have been dropping due to the lack of demand. The Brent traded at about $18 per barrel, down 28%, its lowest point in nearly two decades. 

U.S. regulators have been loath to make oil companies cut production, which in more normal times might constitute collusion.

The Texas Railroad Commission, which regulates the oil and gas industry, punted Tuesday on whether to vote for production quotas until its next meeting on May 5, citing legal concerns and a desire to coordinate with other states and Canada. Instead, the commission created a task force to look at various approaches, including storage capacity and taxes, to help the oil industry.

Of the three commissioners, all Republicans, only Ryan Sitton was willing to vote immediately, calling for a plan to cap production starting in June at 1 million barrels per day for operators putting out at least 1,000 barrels daily.

“If the oil industry drops and tens, hundreds of thousands are laid off, those jobs will come back, but they will never come back to the United States,” Sitton said during Tuesday’s live-cast meeting. “This is much bigger than the oil industry.”

Borenstein said the industry will likely make their drastic cuts to production even if regulators don’t agree on a plan. “The market will sort this out on their own,” he said. “It won’t be pretty, however.”

During the commission’s hearing, Sitton warned against letting the market dictate production. “When people say the market is working, I ask them ‘which part of the market?’” he lamented. “I don’t think inaction on our part is acceptable.”

Many had expected the commission to imitate the landmark deal by OPEC, which earlier this month agreed with allied countries to cut production by nearly 10 million barrels a day. That deal won’t take effect until May, though some member countries are considering earlier cuts.

Commission Chairman Wayne Christian called out the deal, as well as 50 million gallons of oil in supertankers from Saudi Arabia. That oil apparently was shipped just before the OPEC deal was finalized, though some claim it is a further attempt by the Saudis to flood an already saturated market. The tankers are expected to land in the United States throughout May.

“This is literally a war on our industry by foreign adversaries,” Christian said during the commission’s hearing.

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