The Price of Oil Jumped Because the U.S. Might Buy Huge Amounts of It - Barron's

Several U.S. producers would likely go out of business if demand and prices stay low.

Photograph by David McNew/Getty Images

Oil prices rose Tuesday morning following comments by Treasury Secretary Steven Mnuchin that the U.S. needs to buy even more oil at today’s low prices. Government purchases of huge amounts of oil would essentially equate to a bailout of the U.S. oil industry, because several U.S. producers would likely go out of business if demand and prices stay low.

Brent crude futures, the international benchmark, rose 3.9% to $25.85. The U.S. benchmark, West Texas Intermediate, jumped 9.6% to $22.32. Both remain at extremely depressed levels, and few if any U.S. producers can make money at these prices. Analysts have been projecting a 30% drop in activity at U.S. shale-oil wells. Oil prices fell to their lowest levels in nearly two decades on Wednesday.

Mnuchin, speaking on Fox Business around 9 a.m., mentioned the possibility of the government buying $10 billion to $20 billion worth of oil. The details of how that would work weren’t immediately clear. President Donald Trump has already said he wants the U.S. to fill its strategic petroleum reserve “to the top,” which would entail buying 77 million barrels of oil. At today’s prices that would cost less than $2 billion. Mnuchin apparently wants the U.S. to buy enough oil to fill the reserve for a decade, although storing all that oil in the short term would be difficult. The Treasury Department didn’t immediately respond to a request for comment on the logistics.

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A proposal to buy more oil would help producers and the thousands of workers they employ, but it could have a negative effect on consumers, who benefit from low gasoline prices. Mnuchin is also looking to send money directly to Americans, with $1,000 per adult and $500 per child in the near term.

Absent some larger intervention, U.S. oil producers will have to cut their capital budgets even further for oil prices to rebound, argues SunTrust Robinson Humphrey analyst Neal Dingmann. It doesn’t look as if Saudi Arabia or Russia will cut production soon.

“As a result, we believe the best solution for most U.S. E&Ps is to drop activity to not only maintenance capital levels, but to essentially zero; cut cash operating to the highest degree possible, pursue aggressive voluntary compensation reductions, enter into discussions with bank groups, and seek to consolidate to allow for a stronger industry when the dust finally settles,” Dingmann wrote. “We expect many of our operators will soon have to consider dropping to no activity when faced with the potential of even lower crude prices.”

Write to Avi Salzman at avi.salzman@barrons.com

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