A headline in the New York Times this weekend declared that U.S. energy companies are “battening down the hatches.” Major oil companies are apparently eyeing spending cuts, shutting down rigs and trimming their workforces.
At least part of that seems to be influenced by moves from OPEC+ countries, led by Saudi Arabia. During the oil cartel’s meeting over the weekend, eight countries agreed to increase oil output in July.
Matt Smith, energy analyst with Kpler, spoke with the Texas Standard about why the group is doing this, and what it means for U.S. oil producers – as well as consumers. Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: What happened with the latest OPEC+ decision over the weekend?
Matt Smith: Well, what we had was an increase come through of 411,000 barrels per day. They announced that for July.
That’s the third monthly incremental increase of that amount that they’ve announced since they started increasing production in April. They only did about a third of that then, but then May, June and July they’ve ramped it up.
And essentially you’ve got a situation within this group of OPEC members, these different countries, where they’ve had production cuts in place over the last few years. Some have complied with those and some have not, and it’s got to the point where those that have been complying have got so frustrated with those that haven’t that they’ve all agreed to increase production. So those that are not complying kind of are getting hurt by low oil prices coming through here.
So that’s essentially what we’ve got in a nutshell, and that supposedly should be bearish for prices with more supply coming to market.
So why are certain members overproducing?
Well, you’ve had historically the likes of Iraq and Russia overproducing because they’ve tried to get away with it, but then you’ve have the biggest one has been Kazakhstan of late.
And the situation there has been unfortunate in that they have invested billions over decades to get production ramping up there. They’ve had investment from international oil companies, and then as soon as all their production has ramped up, they’ve been told to cut and be in compliance.
And so the challenge for them is they have to ask certain international companies such as Chevron, Eni, to cut production, and they’re just not willing to do that. So it’s a bit of a predicament for Kazakhstan and one they’re not going to be able to get out of, unfortunately.
Saudi Arabia is increasing production again. Are they getting closer producing the same amount of as the U.S.?
You’re right. So Saudi Arabia is increasing, but they’ve kept their production in check for a number of years, kind of close to sort of nine million barrels per day. With these incremental increases, they’re up to about nine and a half million now.
But compared to the U.S., they are still much lower. So the U.S. in recent months has been producing about 13.5 million barrels a day. So, the U.S. is still the largest oil producer in the world by a country mile, really.
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How do we expect President Trump to react to OPEC+’s increasing production?
I expect he’s very happy because he’s essentially wanting lower prices for oil because he wants lower prices at the pump and so, you know, there’s some that are suggesting there’s collaboration underway there. So he’s influencing or encouraging Saudi Arabia to produce more and lower those prices. So I’m sure he’s happy, yes.
Well what oil price do you think he’s targeting and what does that mean for U.S. production and prices at the pump?
Oh gosh, yeah. So I would have said like a good number of months ago it was probably a $60 level to keep U.S. oil producers happy. But now it seems that he’s not concerned about them really. He’s more concerned about getting prices to something like $50 a barrel, just because of the impact that would have on lower prices at the pump.
You know, in Texas right now, they’re averaging $2.70. That’s 40 cents lower than they were this time last year. And that’s the situation across the U.S. here.
So it’s detrimental for U.S. production here. You’re seeing people dialing back in terms of production activity. But the seesaw opposite effect of that is lower prices pump.
Well, what are you keeping an eye on going forward?
We’re going to have to see because OPEC can’t keep putting this volume of crude onto the market without prices really pushing lower here. So even though they’ve managed to agree to do it for these last three months, it seems unlikely that they will continue it over the summer.
Once we get past the peak of summer driving season and we have refineries going into maintenance, that means less crude demand and so prices could really head lower from there if they don’t hit the pause button. That’s what we could see later in the summer here – that’s the thing to watch.
