A complete collapse in oil prices

Submitted by gjohnsit on Mon, 04/20/2020 - 3:10pm

I know what you are thinking: "That title is hyperbolic clickbait".
Not this time.
When I say "complete collapse in oil prices" I mean complete collapse in oil prices!

That's not a typo. That's a negative number on oil futures.

But if you only care about the spot price, check it out.

One penny for a barrel of oil.
Is this the end of the petrodollar? Or capitalism?

Tags:

crude oil

Vote

Comments

Submitted by Raggedy Ann on Mon, 04/20/2020 - 3:19pm

Maybe both?

—

"The “jumpers” reminded us that one day we will all face only one choice and that is how we will die, not how we will live." Chris Hedges on 9/11

Submitted by gjohnsit on Mon, 04/20/2020 - 6:20pm

It gets worse

@Raggedy Ann

Submitted by Raggedy Ann on Mon, 04/20/2020 - 7:24pm

New Mexico’s

@gjohnsit
Is negative too, of course. Our state budget relies heavily on the revenue. Major cuts are coming.

—

"The “jumpers” reminded us that one day we will all face only one choice and that is how we will die, not how we will live." Chris Hedges on 9/11

Submitted by WoodsDweller on Mon, 04/20/2020 - 3:41pm

If it goes on long enough

it could be the end of KSA. Russia has lots of resources, KSA not so much.
We can hope that it's the end of fracking.

—

"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Albert Bartlett
"A species that is hurtling toward extinction has no business promoting slow incremental change." -- Caitlin Johnstone

Submitted by gjohnsit on Mon, 04/20/2020 - 3:45pm

There's a downside too

@WoodsDweller
Think 100,000 unemployed oil workers in Texas and North Dakota.

Submitted by QMS on Mon, 04/20/2020 - 4:21pm

fracking is speeding up

@gjohnsit

the demise of earth
100,000 dirty jobs
is chump change

Submitted by CB on Mon, 04/20/2020 - 3:55pm

Russia is the only country in the world

@WoodsDweller
that has every element on the periodic table.

Submitted by lotlizard on Mon, 04/20/2020 - 5:25pm

EVERY element? — Hassium? Nihonium? Tennessine? Oganesson?

@CB
(There’s some crazy new names of elements in the periodic table nowadays.)

I’m old enough to remember when “mendelevium” and “lawrencium” were new — hence prone to use by Hollywood and other corporate mind-shapers when a writer needed to handwave some weak plot point with pseudo-scientific gabble.

https://tvtropes.org/pmwiki/pmwiki.php/Main/AppliedPhlebotinum

All through my young years, I hoped such discoveries would lead to a breakthrough as good in the eyes of both G~d and humanity as nuclear bombs are evil, but no dice.

Submitted by CB on Mon, 04/20/2020 - 6:12pm

Yes. But only for a few hundred milliseconds

at most.
@lotlizard

Submitted by lotlizard on Tue, 04/21/2020 - 3:42am

Long enough for Wall Street to do high-frequency trading

@CB
https://lite.qwant.com/?q=high+frequency+speed+trading+wall+street&t=web

But taking delivery when commodity futures expire could be a little problematic.

“Oops! Well, it’s gone now. But it did exist for a few milliseconds and was in there at the moment I sold it to you, trust me.”

Submitted by CB on Tue, 04/21/2020 - 11:50am

This could be a feature

@lotlizard

But taking delivery when commodity futures expire could be a little problematic.

“Oops! Well, it’s gone now. But it did exist for a few milliseconds and was in there at the moment I sold it to you, trust me.”

Taking delivery in commodity futures is rarely done. But, if the customer wanted to take delivery, it could be produced at the moment of delivery. It would then become the buyer's responsibility of taking it home or reselling.

I do believe this could become one of the main uses for quantum computers. Just think of the fantastic fortunes to be made. The element could be bought and sold 100,000 times before it exceeded it's use by date. The 99,999th sale could be sold to a pension fund.

We will call it the Schrödinger Pension Fund.

Submitted by Hawkfish on Tue, 04/21/2020 - 4:50pm

I was idly reading about Astatine yesterday

@CB

The freaky thing I learned was that it is so radioactive (h/l 8.1 hours) that you can’t make a sample because is vaporises itself(!)

—

We can’t save the world by playing by the rules, because the rules have to be changed.
- Greta Thunberg

Submitted by CB on Mon, 04/20/2020 - 3:51pm

The damn Chinese must have caused this /s

They are now taking advantage of low prices to fill up their reserves. The US oil reserve is now full and I read the US government is considering paying oil companies to leave it in the ground.

(85 million tons of oil = 700 million bbls.)

China has been storing oil for several years. With prices so low, it can buy more
...
Storage of cheap oil is crucial for China, which has been working for several years to strengthen its emergency supply of oil reserves.
...
This year is also intended to mark an important milestone for China’s oil reserves. By the end of 2020, the country wants 85 million tonnes of oil in its emergency warehouse. That’s almost as much as the US is doing Strategic petroleum reserve – the world’s largest reserve oil supply.

Government researchers in China have also pointed out the successful timing of last month’s crash.

The country must “exploit the opportunity for super low oil prices” and expand its strategic oil reserves before prices rise again, according to an article published in state media last month by Wang Li, a researcher for the Ministry of Commerce.

A closing window of opportunity

Beijing seems to have already begun to fill in stock. China bought 44.9 million tonnes of crude oil in March, which is significantly higher than the 11-month low of 39.8 million tonnes, according to Refinitiv. The data provider expects April imports to match or exceed last month’s.
...

Submitted by QMS on Mon, 04/20/2020 - 4:18pm

saw evidence of the salt domes

in the Louisiana bayous
used to store petroleum
another nightmare awaiting
compromise

Submitted by travelerxxx on Mon, 04/20/2020 - 9:16pm

Commentary

I worked with an oilfield support company for almost 40 years. Some of our guys stay up on the oil situation closely. A former co-worker posted this earlier today. I thought it made quite a bit of sense. (I don't think the link can be accessed by most folks, or I'd provide it. Sorry.)

In case you were wondering about these negative oil prices I found the below which is a pretty good overview of how this happened:

WTI Oil is currently (Monday 4/20 @ 3:15pm) at negative $29.75/bbl (up from -$40) on the futures market.

Brent Oil is currently at positive $26.16/bbl on the futures market.

It should be stipulated that this is oil for May physical delivery, and that the contract becomes binding tomorrow. Meaning that if you are holding a oil futures contract when it closes tomorrow, you just bought yourself, and must take delivery of, actual oil.

What happened today is that speculators in the market just got wiped out. These are people and hedge funds that have been speculating in the market for profit, with no actual capacity to take delivery of oil. The contract ends tomorrow, and they needed to get out, so they placed sell orders, but most of the actual buyers already have their contracts in and aren't looking to buy more as there isn't much demand right now. So these speculators are stuck trying to exit with no one buying.

The upside is that this doesn't reflect the actual price of oil, it only reflects the price that the speculators are trying to liquidate at. The actual price paid by the people who actually take possession of the oil is the price they paid for the contract when they purchased it days, weeks, or months ago.

The problem for the speculators is that (hypothetically) if the May futures contract holds say 200Mbbl and actual buyers only want 160Mbbl of oil, they are going to get stuck buying and taking delivery of 40Mbbl of oil. When they cannot actually take delivery, they are probably going to get sued, fined, and maybe even banned from the market. So it is in their best interest to get out of the contracts at almost any cost, even if that cost is -$40bbl. I have a feeling that many of these funds may go bankrupt either trying to exit or when they are expected to pay for the oil that they cannot take.

In a nutshell, this looks really bad, and if you are a hedge fund, it is really bad, but for the producers, it isn't much of anything. Unless you are the producer selling to a hedge fund, that is probably bad.

Submitted by peachcreek on Tue, 04/21/2020 - 1:02am

I know less about economics than most of you. And...

even less about futures and commodities etc trading. I've seen several people on twitter and elsewhere suggest this would be an ideal time to nationalize the oil industry and/or push through some of the energy infrastructure parts of the Green New Deal. Like I said, Ideally.

So, how does this even happen with a multinational corporation? If anyone could give a timeline or explanation of what steps would need to be taken, in theory, to begin to wind down the fossil fuel industry, or even just say Chevr*n, I would appreciate it. Because I just don't see it happening.
How does the price of oil, as determined by the speculators and gamblers affect the bottom line of the companies that pump the oil? And what does this mean for say Saudi Arabia? Venezuela?
Thanks if you have the time.

Submitted by WoodsDweller on Tue, 04/21/2020 - 7:54am

I'll give it a shot...

@peachcreek
First of all, this doesn't mean the oil industry is dead. It's going to take a lot more than this to kill it. Maybe military action.
What's happened is that the bottom has dropped out of demand. Look at pictures of the great cities of the world, for example:
36 Eerie Photos Of Empty Places
What do you notice? No damned cars! And some goats.
Production is dropping, but not as fast as demand, so storage has filled (where else can it go?). As noted above, this left nobody to close out the speculators' positions when the contracts expired. They had to pay people to take their contracts off their hands.
Each producer wants to be the one who still manages to sell their product in order to keep their cash flowing, letting someone else cut their production. That's the whole point of OPEC, that everybody agrees to share the pain. The lowest cost producers, like KSA, can still make a small profit with very low oil prices. Conventional wells can be shut down with very little impact beyond a loss of cash flow. Offshore oil platforms are leased, and the deep water platforms are horrendously expensive, they can't really afford to shut down. Frackers need a premium price to make a profit. The thing is, fracked wells are financed with bonds and they need cash flow to service the debt. If they don't do it, a bankruptcy court will make them do it. So they have to keep pumping no matter what the price until the wells deplete. KSA and Venezuela need cash flow to keep their economies afloat. Russia has a diversified economy, the lost oil revenue hurts but isn't fatal.
So there are limits. If demand is too high, everything is pumped at full speed but production just can't keep up, new production can't come on line fast enough, and you have to destroy demand with high prices. If demand is too low, the system can't shut down fast enough due to economic pressures, and with the lockdown you can't stimulate demand with low prices.
Is this a good time to nationalize the oil industry? Ask yourself, why on Earth would we want to? So that their losses can be socialized and the investors made whole? All the oil needs to stay in the ground forever, which means ultimately the value of an oil company is zero. Their market caps reflect a fantasy of continued operations.
How would nationalization work if you wanted to go that way? The government takes advantage of crashing oil prices and the associated drop in the price of oil stocks to buy up stock at a better price, creating money out of thin air to do so. They could call it a "market intervention to support the stock market" or whatever propaganda plays well on TV. Norway holds a controlling interest in their national oil company, they didn't buy the whole thing. You could go either way.

—

Submitted by QMS on Tue, 04/21/2020 - 3:04pm

perhaps pay the extractors a subsidy

@WoodsDweller
to keep the carbon in the ground
eliminating the subsidy to extract it
there then the people inhabiting the earth
(or oceans) above said reserves would
derive interest, easing out the extractors

#6
First of all, this doesn't mean the oil industry is dead. It's going to take a lot more than this to kill it. Maybe military action.
What's happened is that the bottom has dropped out of demand. Look at pictures of the great cities of the world, for example:
36 Eerie Photos Of Empty Places
What do you notice? No damned cars! And some goats.
Production is dropping, but not as fast as demand, so storage has filled (where else can it go?). As noted above, this left nobody to close out the speculators' positions when the contracts expired. They had to pay people to take their contracts off their hands.
Each producer wants to be the one who still manages to sell their product in order to keep their cash flowing, letting someone else cut their production. That's the whole point of OPEC, that everybody agrees to share the pain. The lowest cost producers, like KSA, can still make a small profit with very low oil prices. Conventional wells can be shut down with very little impact beyond a loss of cash flow. Offshore oil platforms are leased, and the deep water platforms are horrendously expensive, they can't really afford to shut down. Frackers need a premium price to make a profit. The thing is, fracked wells are financed with bonds and they need cash flow to service the debt. If they don't do it, a bankruptcy court will make them do it. So they have to keep pumping no matter what the price until the wells deplete. KSA and Venezuela need cash flow to keep their economies afloat. Russia has a diversified economy, the lost oil revenue hurts but isn't fatal.
So there are limits. If demand is too high, everything is pumped at full speed but production just can't keep up, new production can't come on line fast enough, and you have to destroy demand with high prices. If demand is too low, the system can't shut down fast enough due to economic pressures, and with the lockdown you can't stimulate demand with low prices.
Is this a good time to nationalize the oil industry? Ask yourself, why on Earth would we want to? So that their losses can be socialized and the investors made whole? All the oil needs to stay in the ground forever, which means ultimately the value of an oil company is zero. Their market caps reflect a fantasy of continued operations.
How would nationalization work if you wanted to go that way? The government takes advantage of crashing oil prices and the associated drop in the price of oil stocks to buy up stock at a better price, creating money out of thin air to do so. They could call it a "market intervention to support the stock market" or whatever propaganda plays well on TV. Norway holds a controlling interest in their national oil company, they didn't buy the whole thing. You could go either way.