OPEC and allies finalize record oil production cut, withholds 9.7M barrels per day

Rapidan Energy Founder and President Bob McNally joins Yahoo Finance’s On The Move to discuss the agreement between OPEC and its allies to cut production by 9.7 million barrels per day.

Video Transcript

ADAM SHAPIRO: But oil is trading higher. At least WTI is at $23, barely $23.01 and change. This after the news of the oil deal negotiated by the Trump administration with Saudi Arabia, Russia, OPEC. 23 countries committing to withhold up to about 10 million barrels of production a day. When you add in sanctions on Venezuela, and Libya, as well as Iran, it could remove as much as 20 million barrels of normal production from the world's output.

To discuss this and where we go from here, Bob McNally, Rapidan Energy's founder and president is joining us. And what do you think about removing what-- anywhere from 20 million barrels from an economy that once needed 100 million barrels a day to maintain?

BOB MCNALLY: Good to be with you, Adam. You know, they're going to remove really a little less than 10 million barrels a day. I think President Trump and others are inflating the numbers somewhat to include forced shutdowns of oil production that would have happened anyway, and increases in stocks, both commercial and perhaps strategic.

So in terms of real barrel counting here, the effort, while historic and the largest we've seen, is going to remove about 9 million barrels a day of real supply. That's about one third of the surplus that's going to accumulate this quarter. And that's why oil prices, as you noted, are kind of ho-hum this morning and sort of basically flat, and suggesting that there's more work to be done. So while a historic deal, not enough.

JULIE HYMAN: Bob, it's truly here. Historic not only because of the amount and the coordination, but also the role of the US specifically, right? As you noted, the president's been talking about this. He tweeted about it this morning with that 20 million barrels a day figure, and sort of expressed optimism that the US energy industry is going to get back on its feet quickly.

What do you make of his role in this? Even though he wasn't physically there at the meeting, of course, and to my knowledge, didn't even sort of phone in, but his presence loomed large, how much more leverage is the US going to continue to have in this situation?

BOB MCNALLY: You know, if this were a Netflix series, this would be an incredible subplot. President Trump has flipped in the last few weeks from being the arch foe of OPEC, or now OPEC-plus, including Russia, the arch foe, to being not only the best friend but really the master of the deal this weekend. He's been very candid in saying, look, he's always hated higher oil prices and hated OPEC. But as now, as he presides over the US becoming the world's largest export-- producer and a net exporter, he sees the downside of lower prices.

So President Trump not only has gotten religion about the dangers of low oil prices-- and at $23 WTI, it still threatens our shale revolution. President Trump understands that now. And he has engaged fully, spending three days over the holiday weekend, mainly tussling with Mexico and Saudi Arabia, over a minor issue to get a deal done. So it's been a remarkable transformation by President Trump with regard to not only his view of oil prices and OPEC, but his need to engage to bring this deal to fruition.

BRIAN CHEUNG: Hey, Bob, it's Brian Cheung here. So I'm curious to hear your thoughts on what the pressures are going to be on the US producers. We knew that there were concerns about default with the prices being that low, below break-even for a lot of these producers.

We saw one go bust already. Do you think that the 10 million figure would alleviate that pressure? And do you think that if it actually does end up going to 20 million, as the president has suggested, what would that do for US producers?

BOB MCNALLY: Yeah, good to be with you, Brian. No, it is not enough. The way we count the barrels, we're still going to see a massive inventory build in the second quarter. And as those stocks fill up, and storage capacity disappears, physical prices of crude are going to come under more downward pressure.

And, again, at $23 WTI, we're below the break-evens for the most efficient shale oil producer. So we are way out of the woods yet. We're not out of the woods. And I think prices are probably going to go lower.

Even if there had been a 20 million-barrel-a-day decline-- and, again, I don't think that number is real. But even if there were, it would be about 2/3 of the problem. It would be a big help, but not nearly enough to still prevent a big inventory increase.

You've got to remember that the big thing here is a problem that's almost too big for OPEC-plus to solve. And that is this catastrophic, sudden screech and a halt to demand. No one is flying. No one is driving. Gasoline demand is down 30%-40%, in Europe, upwards of 80%, and unless that comes back quickly, the pain is going to go on.

JULIA LA ROCHE: Yeah, and, Bob, it's Julia. And to that point, how do you even begin to assess the extent of the economic damage that we've seen, you know, in countries like India, for example, that are locked down, or seen at pretty much everywhere at this point? How do you even quantify that?

BOB MCNALLY: It's impossible. The data even in good times come with monthly lags. So we barely have a good idea of what's happening in the United States in the last couple months, let alone India. And so we really don't have good data.

We see things like satellites tracking ships better. But economic damage, it's hard to see. The only thing I would say is this, paraphrasing Winston Churchill.

We're not even at the beginning of the end of the coronavirus impact. Those impacts are still unfolding on India and even China, but certainly Europe, and the United States, and Latin America. And developing countries, especially very hard to get good visibility. So we're not even at the beginning of the end, much less the end of the beginning. And I think we're going to have to wait to see.