Bomb monkeys operate in the Permian Basin in Midland, Texas, USA, on Saturday, February 13, 2021.
Matthew Busch | Bloomberg | Getty Images
The shocking winter storm in Texas, which left millions of people without power and took dozens of lives, also froze an important local commodity: oil production in the state of the Lone Star, cutting about 4 million barrels per day of the USA.
The consequence will be an increase in revenue and a potential increase in exports between rival oil-producing nations, commodity experts say.
Analysts estimate that the total volume of oil lost by freezing Texas production at somewhere between 18 million and 40 million barrels and about a fifth of US refining capacity has been closed. And while temperatures are rising again and production is expected to rebound mainly at the end of this week, the impact of the deficit in the oil markets is already visible in the recent rise in oil prices.
Brent oil, an international benchmark, has risen more than $ 6 a barrel since the storm hit Texas production facilities in mid-February. The American West Texas Intermediate benchmark rose about $ 3 a barrel.
The development, while adding another blow to Texas, in addition to the devastating damage and human suffering caused by the storm that occurs once in a decade, translates into the global market as a likely blessing for other oil producers , like those in the Middle East.
“The Texas storm helps Saudi and its partners tremendously because it accelerates the path to stock normalization,” said Peter Sutherland, president of Henrietta Resources LLC, a Houston-based energy investment company.
“Simultaneous withdrawals of both raw and refined products are a big wind in favor of spring,” he told CNBC. “It is not just a positive feeling; the approximately 40 million barrels lost due to the storm help to tighten the market.”
OPEC should increase production
The reduction in stocks continues a trend that has caused oil prices to rise steadily from their historic casualties induced by the pandemic almost a year ago. Brent crude has risen 30% in the year to date, with Goldman Sachs predicting it could reach $ 75 later this year, a level not seen since fall 2018.
This could influence decision-making among OPEC members at their next meeting on March 4. While the organization has prioritized production cuts during much of the pandemic to maintain a floor below oil prices, the most promising prospect for demand – and gradually normalizing global supply – provides an incentive for these producers to accelerate the pace of growth of production.
“I would certainly expect Saudi Arabia to increase production, given the current prices that the market has seen,” said Yousef Alshammari, CEO of CMarkets oil market consultancy.
“The disruption of supply in Texas could lead OPEC + and Saudi Arabia to increase production to some extent and much of that increase in production will go to exports at higher prices.” OPEC + is the flexible alliance of 13 OPEC states and 10 OPEC non-oil producing countries.
Saudi Arabia’s voluntary production cuts of 1 million barrels a day are due to end in March and are expected to begin to gradually bring the supply back in April. But it also means that the kingdom cannot take advantage of higher oil prices to increase exports until the production cutoff period ends.
Still, “all oil producers, including Saudi Arabia, enjoy the benefit” of the price increase, said Tamas Varga, senior analyst at PVM Oil Associates. “US crude oil exports will drop in the coming weeks and this provides support for international specifications – again, for oil producers.”
‘Too small on a global basis’
Some analysts do not see the loss of Texas production as a consequence, even in the medium term.
The impact of a loss of 4 million barrels per day “is very small on a global basis, as the world produces more than 80 million barrels per day of oil,” said Rene Santos, North America supply manager at S&P Global Platts Analytics to CNBC.
“Freezes happen in the U.S. every year, but the magnitude we’ve experienced in the past few days doesn’t happen very often,” he said. “In addition, freezes are short-lived.”
Varga from PVM agrees. “The situation is likely to normalize soon, and in the medium term, the impact of the Texas freeze will be negligible, I think,” he said.
But long-term market dynamics are still in favor of OPEC members – not because of the Texas storm, but thanks to the devastating oil production stoppages in the United States when oil prices plummeted. The high cost of shale production in the United States meant that most producers would not survive the impact of the blockades. The U.S. probe count is still 50% below 2019 levels, despite rising prices.
“U.S. oil production is not expected to recover to 2019 levels, which will leave OPEC + with much more influence in the markets in 2021,” said Alshammari.
In the long run, the impact of a climate shock like this month’s “really depends on how Texas will deal with such crises in the future,” he added. “I hope they will be more resistant to such adverse weather conditions on the upstream supply side, but I certainly hope that Saudi Arabia will have greater market share in the long term due to the loss of shale production market share.”