So how bad is it? Look at Plains All American Pipeline’s latest posted prices, indicating the price it’s going to pay (ehem, now be paid…) for physical grades across top oil basins in the US. I highlighted the high and low (to call them something, as all negative) #OOTT
Probably will not go down to well with trump and one of the reasons for prices to go negative
I see that the negative prices have broken most web site oil price tracking charts, it’s a bit like the Y2K bug but totally unplanned for as it was so unexpected.
I was watching on al jazeera interview with “oil experts”. All 3 of them said that this event (2020 crash) can lead to a massive change in economy of oil. I’ve got impression its like they said it is all mighty ‘peak oil’ we where waiting for.
Giants are already switching to ‘green’, but this can be paused due to depression and oil being extremely cheap.
There seem to be an attitude that this time its all different and economies will become more localised afterwards. not sure about that
A lot of countries are learning the hard way, that if you outsource the manufacture of critical products, that you could find yourselves going without. There will be very strong demands for the return of some local manufacturing for critical products.
You can’t make everything for modern economy in small countries like Ireland. Surely you can try to make it in EU.
I get these newsletters every so often. I thought this was an interesting take.
The WTI price crash on April 20 confirms that if the Saudis didn’t realize the potential for their strategy’s explosive success before, they certainly do now. They have no reason to back down.
There are a few producers worthy of callouts.
- Canada’s Alberta province has the most to lose. Not only landlocked, it must sell all its oil into the American market that is already so saturated. Its production must be shut in for years.
- Venezuela was facing civilizational collapse due to mismanagement before oil prices tanked. As oil is the government’s only remaining income stream, this marks the end of Vene as a country. Its oil will not come back for at least a decade, and even then only if an outside power first physically invades the place to rebuild the country from scratch.
- America’s sanctions regime against Iran has been so successful the country isn’t an oil exporter any longer. Its output will absolutely collapse this summer, and the country lacks the funds to bring in foreigners to help restart it or the skills to do the work itself.
- Russian fields are in swamps and permafrost. Drilling is only possible during the winter. Any shut-ins means the wells freeze solid, necessitating completely new drilling. Last time this happened it took the Russians nearly 15 years to get production back.
- Azerbaijan and Kazakhstan are both dependent upon other countries (in some cases, Russia) to transit their crude to market. High production costs plus finicky neighbors equals long-haul shut-ins.
- Nigeria is a mess on a good day, and the supermajors who have made Nigerian output possible have steadily moved offshore to get away from the chaos and violence. Once they turn off their wells, they won’t even consider returning until global prices rise to the point that they are once again willing to subject their staff to frequent kidnapping. That’s several years off.
- Iraq has been in a state of near civil war for some 15 years. The country is now producing over 4mbpd, the income of which helps hold the place together. Negative prices will remove the “near” from the country’s political condition and (at best) make the place a ward of the Arab states of the Persian Gulf.
It is also worth noting that the speed that this could all go from head-spinning to head-chopping is intensely short. Right now there’s still a fair amount of spare oil tankers to shuttle about the world. The Saudis have been leasing out every tanker they can find, so before long all the the world’s tankers will be full as well.
Just to add context, this is what is driving those findings: https://zeihan.com/coronavirus-the-energy-guide/
In terms of global shipments there are really only two ways of moving a lot of crude: by tanker or by pipe. The difference between the two determines how long a producer can hang on in the current, rapidly deteriorating, price environment.
The disadvantage lies with the producers who rely upon pipelines. When demand and storage facilities down-pipeline become maxed out, that’s…it. The pipeline backs up and up-pipeline producers have no choice but to shut-in their production. (There may be some minor shipping via truck or rail, but those options cost more per barrel than pipe and typically first require some new loading infrastructure.)
Shipments via tanker have more flexibility. Ocean-going supertankers can sail to any appropriate port in the world and interface with any coastal demand facility. If one port is full-up, the tanker can just sail to the next.
The Saudis enjoy the second-lowest day-to-day production and second-lowest full-cycle costs in the world (only Kuwaiti oil is cheaper to produce). In addition, all the oil they send to market is via tanker. All else being equal, the Saudis will be the last men standing.
If any of this is remotely correct, there’ll soon be a real crunch in supply when the economy tries to get back “to normal” (returning to infinite growth mode), in a couple of years we could easily see oil prices back over $100 a barrel due to lack of supplies when production cannot exceed around 80% or so of today’s capacity.
I could see a lot of those scenarios occurring if the current lockdowns stayed in place for months. I haven’t filled up the car in two weeks and then I only put in a tenner and it was something to do. Once things start moving again the price will shoot back up. I’d say things will start moving again in Europe in May. Of all the Countries that are in trouble I’d say Iran is the most likely to topple over.
This isn’t setting up low oil for the future, it’s setting up a classic boom & bust (or bust & boom) scenario.
The low oil price is going to absolutely nuke many producers, causing future supply to be curtailed and leading to higher oil prices.
With that being said, oil producers are also getting a glimpse of the near-future when EV’s replace ICE.
The clean air in many cities around the world is also opening people’s eyes to the advantages of EVs.
No doubt in my mind Trump will pass some form of ‘critical manufacturing bill’, preventing/limiting certain goods from being imported (and therefore must be produced domesticially).
If the scramble for medical equipment has caused the US government one thing, it’s the realisation that not only were their hospitals reliant on China for critical medical goods - but so was their military.
And it’s the latter that will drive this policy change.
Other countries will also realise this, but that’s for the “end of globalisation thread”
Oil the original boom and bust industry, there’s no in between (which is how the traders like it), and over the booms and busts the industry has broadly developed it’s own operational flexibility to continue producing without much compromising of safety and environmental protection, but what we are watching now is entirely different in nature, we can be sure that in the energy sector there will be blood, financial commentators will of course glibly say as much to help sensationalise reports to camera on conditions in the energy markets, but for real workers in the very real world of producing and distributing, it really will mean blood, injury and death, more crude than ever is now stored on the high seas, increasing risk of marine oil spills to an all time high, with associated risk of fire and explosion as worn out tankers on final voyages to beaches in Bangladesh or Turkey for dismantling, get hauled back into service for emergency storage, increasing risk of casualties, on land too refineries, pipelines and storage terminals now contain more crude and product than ever, straining plant, infrastructure and manpower resources to the limit as the income that pays for essential repairs and maintenance evaporates, a fatal double whammy in the making.
Blame Lack of Oil Storage
WTI May-dated futures contracts, which expire Tuesday, require futures buyers to take delivery of the oil in Cushing. But given that there is little if any storage space available in that location the traders are ditching their contracts, Burgansky explains.
“Oil traders are selling tomorrow’s futures to avoid taking a physical delivery,” he wrote in a recent report. Instead, traders are now buying June-dated contracts, which recently were fetching approximately $23 a barrel.
None of these gyrations are happening with Brent crude futures. Brent crude can be delivered offshore to a variety of locations, explains Burgansky. If there isn’t much storage in one place then the oil can be delivered elsewhere.
In simple terms, the flexibility of the Brent futures contract means that lack of storage in one place isn’t forcing traders to dump futures contracts in the way that it is with WTI futures.
I wonder how the price will bounce around before the June settlement date on 19th May.
The current oil price spat is caused by 2 things.
- The demand for oil. 100m barrels a day in early 2020, is probably no more than 70m barrels a day now.
- Saudis sense an opportunity to nuke weak producers, Russia and the US are the 2 main targets…the Saudis are showing up everywhere with cheap oil, Gdansk in Poland for example.
I would estimate that Trump will enact tariffs on imported oil this week…the dope will probably tweet an outline by sunday or so. I estimate the tariffs will make oil cost ~$30-40 a barrel in the USA by June. This does not resolve oversupply elsewhere of course. However the US which was approaching oil independence at around 12m barrels of production daily will also lose 4m barrels of production in a shale bust…no matter what Trump does.
This means he will more than likely exempt Canada and Mexico from tariffs if he goes that route and take 4m barrels a day of their product for ‘self sufficiency’ purposes.
The main importing blocks, China Europe and India, will not do anything other than buy cheap oil. and let the Saudis smite the rest of the competition.
When the dust settles the idea is that Saudis will control the world price, unilaterally, and the next time the Sheikhs ring Putin he will do what he is told on the spot!!! The Saudis will want certainty that Shale in the USA is pretty dead too and this is their chance, even if tariffs are applied unilaterally. The shale sector has blown a third of a TRILLION US$ on speculating and that money is mainly gone now.
In addition to a permanent loss of 4m barrels a day of shale production in the US I would think that other producers like Russia will end up collectively losing another 6m barrels of production from shut ins.
Wells that need careful handling may never produce again after a shut in. This will reduce global oil production to 90m barrels from 100m barrels and by the end of 2021 we will be back at $50 a barrel again.
$50 a barrel makes the investment case for south american oil finds marginal, at best. While there are large fields off Brazil and Guyana the cost of exploiting them is so high that they will be left there unless oil is over $50 a barrel for a sustained period.
Geopolitically this will also be interesting, will Trump pull his navy out of the Gulf and tell the Chinese that if they want it they can police it too…and keep Iran in check. ??? I think he will threaten that within the next few months as well as tariffs.
We are seeing America withdrawing from foreign engagements, which only allows others in. America’s current power comes from its engagement with the outside world, and the reordering it pushed under Bretton Woods.
The only winners can be China and Russia - the EU can’t project the mix of financial, military and commercial power that the other can. The EU is just a loose amalgamation of some European nations, designed to keep each other in check more than anything else, (I laugh at these anti-EU arguments - there will never ever be a federalist Europe, no-one putting these notions forward understands the real geopolitics of Europe).
But the US is rich enough to go it alone (or more alone) for a long time. They really can have a choice in how much they engage, now or in the future.
The wildcard is Russia, with a declining population, but with a still substantial military industrial complex. If the US disengages enough, then it will feel NATO (which it sees as just a modern precursor to invasion, of which it has had many over the North European Plain), will be neutered enough. So that front will be seen as contained and attention can focus elsewhere.
The Russians are not as culturally inhibited as the US in bluntly obtaining their objectives. The Saudis can’t fight.
Planning permission aside, how quickly could a storage tank be built ?
I think it all comes down to storage facitities.
If supply continues apace and demand remains subdues, it may well be going negative earlier than May futures.