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US Pipeline Operators Urge Oil Producers to Slash Output as Storage Reaches Max Capacity

Last week, the US Department of Energy announced plans to purchase 77 million barrels of oil on the domestic market to shore up the country’s strategic reserve amid the increasing coronavirus outbreak.

US pipeline operators are asking producers to cut oil production amid the ongoing COVID-19 pandemic that has led to drastic cuts in global crude output, Bloomberg reports.

The news agency quoted Plains All American Pipeline LP, one of the country’s largest shippers of crude, as saying in a letter earlier this week that the company is “sending this proactive request to our suppliers to ask that you take steps to reduce oil production in response to the pandemic”.

According to Bloomberg, the request is “the clearest sign yet that a growing glut of crude is overwhelming storage capacity”.

This comes as Texas Railroad Commissioner Ryan Sitton tweeted on Saturday that some oil companies are getting letters from US shippers, in which they are calling for production cuts because they are out of storage. Sitton, along with three other officials, was elected to oversee the state agency that regulates the oil and gas industry.

He told the Houston Chronicle that “you are facing a situation where there’s so much demand destruction from people staying home because of COVID-19 and there’s so much oil flowing right now with no place to go”.

“The supply chain is facing a problem and it backs up all the way to the gas stations”, he added.

Sitton described COVID-19 as a “common enemy” that the international community is grappling with, adding “we’ve got to do things that we’ve never done before because we’re facing a problem that we’ve never faced before”.

The Houston Chronicle also cited Ed Longanecker, president of the Texas Independent Producers & Royalty Owners Association (TIPRO), as saying that in the letters to oil companies, shippers state that they plan to terminate or change crude purchase contracts against the backdrop of plummeting demand and refinery slowdowns.

“TIPRO requests that President Donald Trump escalate US diplomatic efforts with Saudi Arabia and Russia in response to their deliberate decision to flood world markets with oil, while considering other options to protect domestic energy producers”, Longanecker pointed out.

US to Top Up Strategic Oil Reserve With 77 Million Barrels

The statement comes after the US Department of Energy (DOE) said last week that it plans to buy 77 million barrels of oil on the domestic market to shore up the country’s strategic reserve, including an initial purchase of 30 million barrels in the immediate future.

“DOE is moving quickly to support US oil producers facing potentially catastrophic losses from the impacts of COVID-19 and the intentional disruption to world oil markets by foreign actors”, Energy Secretary Dan Brouillette was quoted as saying in a press statement on the department’s website.

The move followed President Donald Trump ordering the US’s strategic oil reserve to be filled “up to the top”, cancelling earlier plans to sell off part of the rainy-day supply. This came as Washington announced an $800 billion+ package of measures to tackle the economic impact of the coronavirus outbreak, with the steps including a payroll tax holiday, filling up the Strategic Petroleum (SPR), and other initiatives.

Oil prices nosedived drastically following an OPEC+ meeting in Vienna on 6 March, when the group failed to reach agreement amid a Saudi push to raise production cuts by 1.5 million barrels per day (bpd) through the end of 2020, on top of the 2.1 million bpd in cuts already agreed upon.

Russia did not agree to the additional cuts, prompting Riyadh to unleash a price war, offering discounts for April futures and announcing an increase in production of several million bpd.