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Next up for oil market: Texas regulator to decide on crude output cuts

The Railroad Commission of Texas will hold a hearing Tuesday that may result in limits to the state’s oil production following a drop of more than 60% in U.S. benchmark prices so far this year and expectations that domestic storage will soon reach full capacity.

“The hearing will decide whether the RRC will immediately reduce Texas production,” said James Williams, energy economist at WTRG Economics. “The main issues will be what impact will it have on international prices and will it increase price enough to offset the lower production.”

The hearing at the state agency, which regulates the oil-and-gas industry in Texas, comes not long after the historic decision by the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, to cut oil production through April 2022.

OPEC+ agreed Sunday to reduce overall crude-oil output by 9.7 million barrels a day from May 1 through June. It would then reduce that cut to around 8 million barrels a day from July 1 to end of the year and then lower it to 6 million barrels a day from Jan. 1, 2021 through April 2022.

The RRC said it would hold the hearing after a formal request from Pioneer Natural Resources U.S.A. Inc. PXD, +4.06% and Parsley Energy Inc. PE, -2.73% to “determine reasonable market demand for oil in the state of Texas.”

In an interview earlier this month, Scott Sheffield, chief executive officer of Pioneer Natural Resources, told CNBC that producers in the state were told by purchasers that oil storage is going to be full by May 15.

“We are asking for a 20% [production] cut until September 30 with the Texas Railroad Commission,” Sheffield told CNBC, adding that April 14 is the key date and that on April 21 the Texas RRC would make a decision.

“A free market [versus] government regulation is a major issue,” Williams said. “In most cases the oil industry favors free markets, but COVID-19 is not a normal market and some in favor of no government intervention are willing to make an exception.”

He told MarketWatch that much of the discussion at the hearing will “center around if the RRC intervenes, how much will they cut and how much support will that provide for prices.”

OPEC+ agreed to a cut “that is almost twice the size of total Texas production, Williams said, pointing out that oil prices found little support in the aftermath.

On Monday, U.S. benchmark West Texas Intermediate crude CLK20, -2.37% settled at $22.41 a barrel, down 63% year to date, while global benchmark Brent crude BRNM20, -0.44% was at $31.74 a barrel, down nearly 52% for the year.

“The real problem is the oversupply relative to the ability to use or store it downstream from production,” said Williams. “That results in a steep discount from the Nymex price at Cushing or the international price as indicated by Brent.” Cushing, Oklahoma, is the location of the storage hub for Nymex oil.

Williams said that “while a reduction in Texas supply would provide some support for international prices the major benefit would be to reduce the discount faced by producers to the international price.”

“Companies in the Bakken or Permian Basin that have downstream storage and committed pipeline capacity do not face the heavy discounts,” he said. “It is the usually smaller producers that face much lower prices. The Texas RRC will not solve the world price issue, but could minimize the discounts to the world price.”

“Action by the RRC would, in the short term, mitigate the discounts and provide a little help to producers,” said Williams.

However, “with or without intervention by the Texas RRC, Texas oil production will decline this year as there is insufficient cash to support drilling or completion of additional wells at the current price,” he said.

In a monthly report issued Monday afternoon, the Energy Information Administration forecast a monthly fall in U.S. shale oil production of 183,000 barrels a day to 8.526 million barrels a day in May. Oil output from the Permian Basin, which covers parts of western Texas and southeastern New Mexico, is expected to see the biggest drop among the shale plays, down 76,000 barrels a day in May from April.

Also on Monday, RRC Comissioner Ryan Sitton issued a statement that mentioned the OPEC+ agreement and said that the cuts, combined with the 1.5 million barrels that the U.S., Canada and Brazil have already cut, “world supplies will have dropped over 11 million barrels from a week ago.”

Sitton then raised the question of whether the Texas RRC should do anything more.

“I have not advocated for Texas to prorate. I have advocated that we consider it,” he said. “I felt that we should be open to evaluating any path that helps to bring the international oil community together in a global deal.”

He also said that “none of us likes the idea of government control of private enterprise, but we also acknowledge that these unprecedented times require us to consider all options to bring stability to the industry that we regulate.”

Sitton said he would consider the testimony presented at the hearing before deciding whether to issue a vote for or against proration.

Tom Kloza, global head of energy analysis at IHS Markit’s Oil Price Information Service, meanwhile, appeared to somewhat play down the importance of Tuesday hearing.

“It will be controversial, but I don’t believe it will do much to sway producers or to put together some Texas style cartel,” Kloza told MarketWatch.
Source: Market Watch

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