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Crude price collapse will finally force US oil industry to cut production or go bust

Crude price collapse will finally force US oil industry to cut production or go bust
The oil-price plunge could create a historic precedent in which the US may finally help boost the sinking energy market, albeit involuntarily, instead of benefiting at the expense of others, oil executive Mike Cantrell believes.

The price of US benchmark West Texas Intermediate (WTI) contract for May finished trading on Monday in negative territory for the first time in history, falling to -$37.63 per barrel. Despite briefly bouncing back on Tuesday, the futures then tumbled again below zero before rising on Wednesday to $11. 

The situation is caused partly by the lack of storage capacity, amid a historic demand shock triggered by the coronavirus pandemic. However, it’s not those working in the oil fields, but traders, who are sending crude prices into a tailspin, an oil industry insider told RT.

“It’s not oil and gas producers doing this, it’s traders on the market. They got caught with negative positions, when they were extremely long - in other words they had to pay someone to take barrels that they did not want to take,” said Cantrell, who is Co-Chair & Board Member of Oklahoma Energy Producers Alliance and Chairman of Postwood Energy LLC.

As for producers, if they don’t have storage capacity, they’ll just have to shut their wells, slashing overall US production by at least a third. The industry expert believes that half of American oil production or even more could go offline after Monday’s market rout, while most US shale producers are doomed.

“Probably for the first time in history the US market is doing its fair share to balance the markets involuntarily,” Cantrell told RT.

He added that it is “totally unacceptable” that the US increased its production at the expense of Russia and Saudi Arabia, who were cutting output to boost prices. While the US government cannot force all companies to stop pumping oil, there are still statutory provisions in the law that prohibit wasting natural resources. For example, there is a statute in Oklahoma that prohibits oil to be sold below its actual value, the oil industrialist says. 

“They have not only the power but the responsibility to shut everything right now,” Cantrell stressed, adding that he hopes that the authorities do not allow any wasteful production and introduce some caps. 

However, it seems only small producers, that account for around 20 percent of total US production, are in favor of limiting output. Despite the unprecedented situation on the market, which is flooded due to the destruction of demand inflicted by the worldwide coronavirus shutdowns, bigger corporations would rather go out of business before they do that, the oil executive noted. The pandemic did become the last nail in the coffin for US shale companies, as they initially were not meant to survive for long, except for some heavyweights of the Permian Basin, like Concho, EOG and Pioneer.

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“If we had not had the coronavirus we would have half of those companies going bankrupt anyway this year,” he said, explaining that their business model is the problem, as they have to constantly drill, requiring massive funds. “I’d be shocked if the government bailed out the shale drillers.”

“It’s three to five years before US production gets back to the level it is now,” the analyst concludes. “Tens of thousands of people are going be laid off. It’s a bloodbath in our economy in the US.”

For more stories on economy & finance visit RT's business section

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