Unprecedented Oil Glut Appears Inevitable

The U.S. has voiced its concerns over the Saudi-Russian oil price war, but thus far, those concerns appear to have fallen on deaf ears. In an interview that was broadcast on CNBC, Senator Ted Cruz (R-TX) answer the question, “Do you think President Trump should try to use his influence with Russia or Saudi Arabia to try to get them to stop producing so much oil?”

“Absolutely. I think that is a major priority especially for my home state of Texas. And if you look what happened, right in the midst of the coronavirus crisis, a public health crisis that is dominating our focus, and an economic crisis that is flowing from it. Millions of people losing their jobs.

“The Saudis and Russians decided to take advantage of that crisis by flooding the market and driving the price of oil way, way down. And that was opportunistic. It was designed with a very specific purpose. The Saudis are trying to drive out of business American producers, and in particular shale producers, largely in the Permian Basin in Texas, North Dakota and in a number of oil producing states across the country.

“That behavior I think is wrong. I think it is taking advantage of a country that is a friend.

“A couple of weeks ago, I joined with thirteen senators in a letter to the Saudi Ambassador to pull back and stop trying to drive the price down to artificially low. Nine of the thirteen did a conference call with Saudi Ambassador that was as candid a call and direct a call as I’ve ever had with a foreign leader. The nine of us unloaded on her. And their defense was but Russia is doing this.

“I said but Russia is not our friend. We treat them accordingly. We are aware of their intentions to us.

“The Saudi Kingdom is supposed to be our friend. We are a military ally a diplomatic ally. And you are not behaving like a friend when you are trying to destroy thousands and thousands of small businesses all across Texas and the country.

“The senators on the call with the Ambassador said there is a whole series of steps we can take to escalate foreign policy pressure and we outlined a number of them if you continue engaging in economic warfare against the United States trying to drive down the price of oil in order to exploit this coronavirus crisis to drive a bunch of American producers out of business.

“I’m hopeful the president will echo that same message and I’m hopeful the Saudis will hear it because those thirteen senators were not only strongest champions of energy and natural gas but also have been historically the strongest allies in the senate of Saudi Arabia. And if they don’t change their course, the relationship with the United States is going to change.”

Last week, the U.S. Secretary of State Mike Pompeo called Saudi Crown Prince Mohammed bin Salman (MbS). The State Department released a statement which said in part:

Secretary Pompeo and the Crown Prince focused on the need to maintain stability in global energy markets amid the worldwide response. The Secretary stressed that “as a leader of the G-20 and an important energy leader, Saudi Arabia has a real opportunity to rise to the occasion and reassure global energy and financial markets when the world faces serious economic uncertainty.”

And on March 30th, President Donald Trump called Russian President Vladimir Putin and the two agreed to have their top energy officials meet to discuss slumping global oil markets, the Kremlin said.

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Trump said in an interview, “We don’t want to have a dead industry that’s wiped out. It’s bad for them, bad for everybody. This is a fight between Saudi Arabia and Russia having to do with how many barrels to let out. And they both went crazy, they both went crazy.”

Although the price war certainty was an impetus for a large break in oil prices on March 9th, following the failed OPEC+ meeting on March 6th, the reality is that the amount of extra barrels supplied by Saudi Arabia and Russia, about 4 million a day in April, is still only a fraction of the global surplus, predicted to be around 20 million barrels per day in April and May. Even if Trump could get the Saudis and Russians to reverse course, an unprecedented build in global oil inventories would still occur, crushing oil prices.

“Any potential agreement between the U.S., Saudi and Russia to freeze or reduce output is too little too late. It would take months to impact inventories globally and would be dwarfed by the current demand losses,” Goldman Sachs wrote. And it has warned that oil demand may never return to its peak before the virus started spreading. Business, consumer and personal behaviors are being changed out of necessity, and some of the changes may persist, requiring less oil.

Floating Storage

The oversupplied market may drive as much as 100M barrels of oil into floating storage, “and probably more,” International Seaways (INSW) CEO Lois Zabrocky told Bloomberg.

IHS Markit says the world could run out of places to store oil in just three months if supply exceeds demand by 12.4 million barrels per day in the second quarter. It projects that supply will exceed demand by 1.8 billion barrels during the first half of the year. However, there are only 1.6 billion barrels of storage capacity still available, so producers would be forced to cut production because, by June, there would be no storage capacity left.


President Trump and U.S. lawmakers want Saudi Arabia and Russia to cease and desist in their mission to drive oil prices lower and U.S. shale producers out-of-business. And they have leverage.

However, given the size of oil demand destruction that is taking place, the problem would exist even if the two producers comply with American demands. A glut of oil of unprecedented scale appears inescapable.

Check back to see my next post!

Robert Boslego
INO.com Contributor - Energies

Disclosure: This contributor does not own any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

5 thoughts on “Unprecedented Oil Glut Appears Inevitable

    1. Have you calclated the cost of that. Its easy, just start pressing buttons on your smart phone calc!

    2. The USA should place an Embargo on Russian and Saudi Arabian oil, or tariffs on One and embargo on the other. We import 1 million barrels a day from both countries. Let them fiht it out in the international markets and destroy themselves while we prosper.

      We produce enough oil to export oil and refined products to the world, and keep our refineries busy, and shale oil producers producing and profitable. It avoids BK for them, and increases employment through the nation.

      Shale producing record amounts, USA Cartel with Russia, Nigeria, Mexico, Venezuela and others, and we have the power and the allies to make it work and keep low oil prices.

  1. Considering overall scenario and all concerned factors, I think, now oil caught in a "one way street" if we accept that there is any game or strategy fixed-up by Saudi, or Russia or speculator group or anyone else, thereafter, due to rapid spread of pandemic, now situation became beyond the control of that initiators too. So at this juncture even if any of the deemed involved players want or wish to reverse this, they just can't do anything. At list for near future, we may find even some more pain, and situation may get even more worsen but from this level return back is not possible at all now, and therefore, we don’t expect even any hope so far.
    It is very clear that when any market become spoiling, and cross certain boundaries, it takes very long time to find normal situation, oil, is entered in the same dangerous territory

  2. I personally believe this is a breath of fresh air. After all the years we have worried about high prices of oil and the effect of that high price on the world economy plus it placed many people in financial difficulties privately,

    Wellcome lower oil prices.

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