Brown on Business

March 23-29, 2020

By Wesley Brown


From Russia to Arkansas with love


Most times, global economic markets have little impact on what happens in Main Street America, much less Maple Street in Arkansas.


However, as the COVID-19 crisis touched off mass selling in financial markets worldwide, recent actions taken by Russia and the Organization of the Petroleum Exporting Countries (OPEC) will likely have a huge impact on Arkansans – both good and bad.


At a March 5 meeting in Vienna, the oil cartel known as OPEC recommended extending the duration of the proposed 1.5 million barrel per day production adjustment until the end of 2020, instead of June 30.


“The consultations, monitoring and constant review undertaken of current market conditions demonstrate the strong commitment of OPEC Member Countries to work together to restore oil market stability,” OPEC said in statement. “[We] are determined to jointly rise to meet the current pressing challenge”


That 1.5 million barrel per day “challenge” means Saudi Arabia and the other 13 oil-producing countries that are members of the cartel would like to cut oil production to levels not seen since the global financial crisis in 2008. The new OPEC target was also 500,000 barrels per day and six months longer than earlier forecasted.


At the oil cartel’s last meeting in Vienna at the end of 2019, Russia and other so-called OPEC+ countries also agree to reduce crude oil output in tandem with the oil cartel. But quicker than you can say “ruble,” the new deal has stalled after Russia Energy Minister Alexander Novak told OPEC that the current agreement that expires on March 30 should end. Russia’s largest oil giant, Rosneft, has argued instead that the OPEC-led oil production limit would give further dominance to U.S.-based shale oil producers. 


Faced with Russia walking away from the already shaky pact, OPEC leader Saudi Arabia countered with a threat to flood the global market with cheap oil as Wall Street analysts predicted that energy demand would collapse due to the growing coronavirus threat. As of early March, crude oil prices have been in an agonizing freefall that still has more room for pain.


The sticking point for both Russia and Saudi Arabia is that it has been about two years since the U.S. moved ahead of both countries to become the world’s largest oil producer in August 2018, according to the U.S. Energy Information Administration (EIA). That outlook was well ahead of an earlier forecast by the International Energy Agency, which predicted the U.S. would likely overtake Russia as the world’s largest oil producer in 2023.


American influence at the top of the oil derrick has brought West Texas Intermediate (WTI) back to the forefront as a premium benchmark crude for North American refiners and distributors. In the past two years, the price gap between the WTI’s light, sweet blend, and the higher-grade international Brent crude has already narrowed.


For example, the EIA has forecasted that Brent crude oil spot price will average $65 per barrel in 2020 and $68 in 2021. On the other hand, the WTI spot price was forecasted at $59 and $62 per barrel, respectively, in 2021. However, since the Russian kerfuffle, the EIA revised its forecast for 2020 and 2021 in March as global markets adjust to the changing OPEC winds.


On March 16, global oil prices had plunged below $30 a barrel mark after seeing their worst day  since 1991 a week earlier. In New York, WTI prices plunged 10%, or by $3.16 at $28.57 per barrel on the NYMEX. In London, Brent prices fell 12.1%, or $4.11 to $29.75 a barrel, which is about 42 U.S. gallons. 


Of course, the good news for American consumers is that the EIA has revised its yearly forecast for WIT and Brent to $37 and $43 per barrel, respectively, for 2020. That is a $22 price drop for both of the world’s highest grades of premium crude that are easier to refine than heavier blends into products like gasoline, motor oil, jet fuel, and heating oil.


Based on that lower oil price forecast, the EIA expects retail prices for regular-grade gasoline to average $2.14 per gallon in 2020, down from $2.60 per gallon in 2019. For price-conscious consumers, retail gasoline prices are now forecasted fall to a monthly average of $1.97 per gallon before rising to an average of $2.13 per gallon from June through August at the height of the summer driving season.


Generally speaking, pump prices in Arkansas average about 30 cents lower than the national average, meaning Arkansas motorists may see prices nearing $1.50 a gallon before Russia and Saudi Arabia decide they’ve had enough. 


Bur there is some bad news too. If Vladimir Putin plays his hand right, falling global oil prices will drive some U.S. oil companies out of business before the oil-dependent Russia economy goes into a tailspin. That would put Russia and Saudi Arabia back atop the oil rankings end America’s brief reign as the world’s largest oil producer. 


And that Russian kompromat about forcing U.S. companies out of business is already moving closer to reality here in Arkansas. On March 12, El Dorado’s Murphy Oil Corp. announced it was immediately revised its $1.5 billion budget for 2020 due to current market conditions and recent commodity price volatility. Murphy’s spending plans now stand at a puny $950 million, a $500 million decline that equates to a nearly 35% cut compared to the previously announced capex of between $1.4 billion to $1.5 billion. 


“Under current conditions, we believe this capital reduction program allows for financial flexibility and preservation of our longstanding dividend,” said Murphy President and CEO Roger Jenkins. “As always, we will not sacrifice safety in our efforts to reduce costs across all our assets, as it remains a core value within Murphy.”


Since 2009 when it peaked at the 83rd spot in the Fortune 500 with a market value of $9 billion, the El Dorado oil producer’s fortunes have sunk in line with global oil prices. And only a few years after deciding to exit the Brent-focused international oil markets by selling off its long-held deep-water play in Malaysia for more than $2.1 billion, Murphy had seen a brief turnaround of sorts by relocating its drilling rig back to North America.


At the end of 2019, Murphy was rewarded with profits of $1.1 billion for the year after deploying significant investment capital in the Eagle Ford Shale, offshore Gulf of Mexico, and coastal Canada. The biggest line item included $680 million in spending in the oil-rich West Texas shale play that has become the bane of Russia and OPEC.


And if the Russian gamble actually works, Arkansas consumers will be very happy when they see plummeting pump prices. But certainly, folks in south Arkansas don’t want to choose between cheap gas and losing an iconic Arkansas corporate titan that has birthed two billion-dollar South Arkansas corporate off springs in Murphy USA and the former Deltic Timber Corp.


Still, Murphy’s Jenkins has tried to assure Wall Street that all is OK in South Arkansas after the company’s stock touched a 52-week low last week of only $5.96, dropping the former oil giant’s market value below $1 billion. Although Murphy plans to delay or halt certain drilling projects, Jenkins has not offered if the company plans job cuts similar to the oil crunch in late 2015 that forced the company to cut 23% of its global workforce and slash its budget to only $580 million.


“We have persevered through multiple commodity price cycles in our 70 years of corporate history and want to provide reassurance that we are focused on a strategy that protects the business, the balance sheet and our liquidity, while maintaining optionality for additional adjustments given the unstable environment,” said Jenkins.


Russian threat or otherwise.


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