Oil price discussion and analysis

[rederob]

With a $3/bbl increase in the last hour, WTI bounced strongly overnight. In fact the daily change represents a 24% increase:

The question is what has it jumped in to?
There is nothing to sustain it.
Worse, whatever there is, it will actually decline near term.
This has all the ingredients of a dead cat bounce.

...factors that account for the current price of oil:
(b) Price war within OPEC.

The price war is predominantly between non-OPEC members; namely Russia, but with the USA as a defacto casualty. Only Russia is in profit at these low prices as although the Saudis have a low lifting cost, their whole economy is predicated on POO nearer $50/bbl. Russia and the USA have more diversified economies, however the USA's LTO sector is unique and will be a significant casualty.

 

[wayneL]

For me it's a game of minimum price discovery. I've taken a few *small CFD positions between 22s and 29s.

 

[Smurf1976]

For me it's a game of minimum price discovery. I've taken a few *small CFD positions between 22s and 29s.

I bought some OOO yesterday but at this stage I'm only seeing this as a bounce. Time will tell.

As an outside the box thought, at the moment we have three powerful forces at work.

First is the sell off in everything and the flight to safety amidst an unknown future with the virus.

Second is the price war and in that context I note that "big oil" as per a previous post is largely "big government" in practice and broadly speaking the government owned companies own the lower marginal production cost assets globally. Even though their national economy might tank at $20 per barrel, if the marginal cost of production is $3 then they are still better off pumping flat out unless restricting production actually raises global prices significantly, an outcome which in practice requires agreement among producers to act collectively.

Add in the political and strategic aspect, that they may well be willing to run at a massive loss in order to intentionally bankrupt competitors, and the idea that they just keep pumping no matter what the value is a definite possibility. Governments with a political or strategic agenda aren't worried about share prices or quarterly profits and tend to play a much longer game than private enterprise.

Third is demand destruction. Nobody knows for sure at this point but reality is the aviation sector has fallen in a heap rather spectacularly, private car use will be down at least somewhat, all forms of freight transport will be down to some extent, industrial production is down, etc. Oil consumption will have dropped very substantially and I'll say there that whilst the figure is unknown, it's not implausible that the drop is to the point that no single producing country or company is now critical to supply. It would only need a 10% or so drop globally to do that and we may well find out once statistics are available that this has in fact occurred given the extent to which the economy, particularly that which involves physically doing or moving things, is grinding to a halt.

That being so, I'm not going to try and predict prices but I do think that at the bottom it's not out of the question that we see something in the category of being truly ridiculous. All it needs is everyone to keep pumping long enough that the physical market is literally flooded, finding somewhere to store the oil starts to become a problem, and then someone credible releases some data which shows a huge drop in consumption at a moment that coincides with another broad sell off in all assets and plausibly the price ends up at a ridiculously low point.

There's a lot of "what if" speculation there and that's all it is but point is nobody on earth really knows how much oil is being used by consumers right now but it's safe to say it will have dropped quite a bit. Add in producers ramping up production with the objective of sending others broke and the price ends up at ???

 

[Smurf1976]

Another thought - what about the Texas Railroad Commission?

The TRC, for those not aware, has nothing to do with railways these days despite retaining that name but does regulate oil production by the imposition of quotas. Since about 1970 those quotas have been constantly at maximum, so there's no limit in practice, but the TRC most certainly still exists as does its power to impose restrictions on output as they routinely did from 1930 to 1970.

It's not impossible that they could act to raise prices if they wanted to, the legal ability to do so and the organisation to do it still exists despite having not done so for half a century.

 

[ducati916]

Citi: $5 oil is possible. Citigroup laid out a pessimistic scenario in which WTI falls to $5 per barrel. Energy Aspects said Brent could fall to $10. Mizuho Securities said some oil could even fall into negative territory absent shale shut ins. “This is Operation Desert Storm, Enron, 9/11, Hurricane Katrina/Rita, Lehman Bros, combined,” Stephen Schork, president of the energy consultancy Schork Group Inc., told Bloomberg.

Majors could store jet fuel at sea. Oil companies are rushing to store oil at sea, but the glut has become so severe that the majors are looking at even storing jet fuel at sea. That practice is rare because jet fuel degrades more quickly than other fuels and is sensitive to contamination. “The industry generally expects products will be used within three months of being produced,” said George Hoekstra, an independent consultant, told Reuters.

Texas considers the unthinkable – regulating production. Several oil executives have reached out to the Texas Railroad Commission, which regulates oil and gas in the state, asking for regulation on production in order to rescue prices, according to the WSJ. In Bloomberg Opinion, Texas Railroad Commissioner Ryan Sitton proposed rationing production, cutting output in the state by 10 percent.

North Dakota to keep inactive wells inactive. North Dakota regulators are considering moves that would allow oil producers to keep their wells inactive, rather than forcing them to choose between producing and reclamation. The logic would be trying to keep unwanted production offline.

Shale drillers getting crushed. More shale drillers are exploring debt restructuring as WTI sinks into the mid-$20s.

Shale industry lost $2.1 billion last year. A survey of 34 North American shale-focused drillers reported a combined $2.1 billion in 2019, according to IEEFA. That capped off a decade in which they spent $189 billion more than they generated.

Capex cuts top $31 billion. The global oil and gas industry has already slashed $31 billion from spending plans this month, following the historic collapse in prices.

jog on
duc

 

[rederob]

The below chart shows the dead cat bounce coming to fruition:

However, it appears it is now much worse for oil prices as they slumped further in late trading, falling under US$20 a barrel to settle at $US19.84.

 

[CBerg]

Is there anyway for a mere mortal to take delivery of some oil at these prices?
I know oil is not the same thing as unleaded petrol but my god, $20 USD let alone $5 USD per barrel!

Any of you more involved oil watchers care to guess what we'll be paying at the pump soon?

 

[Sdajii]

Is there anyway for a mere mortal to take delivery of some oil at these prices?
I know oil is not the same thing as unleaded petrol but my god, $20 USD let alone $5 USD per barrel!

Any of you more involved oil watchers care to guess what we'll be paying at the pump soon?

At this point prices won't fall as much as you might expect. Normally, petrol prices are approximately half oil, half a combination of refining, distribution, middle men, taxes and retail costs. If oil goes to zero you don't get free petrol, you still have a fairly pricey product. I don't think petrol prices can full much below about a dollar (varying state to state due difference in taxes, distribution and retail costs).

 

[rederob]

This links to some big picture machinations over the weekend.
On the oil front, early action has not been good.
This chart is a continuation of the March trend:

 

[basilio]

With such a world wide lockdown particularly in First world countries oil demand would have to plummet.
Bugger all air traffic. Huge numbers of cars off roads. Much industry closed down.

Only country that seems to have got on top of it is China. But now of course no one else will be buying their stuff becasue they are in lock down so their industries will be closing as well.

 

[peter2]

E'gads, I've selected OOO for the April comp, forgetting that the whole world is shutting down. No-one will want oil. With Joe being tougher than the Saudi's I can't change my pick. That being said the Saudi's will dictate the POO and April is a good time to increase it.

 

[frugal.rock]

Is April a good time to increase the poo again because the northern hemisphere goes into winter?
Just wondering your thoughts behind the April scenario P2.?
Does oil still travel the seasonal path?

 

[peter2]

Actually the northern hemisphere is going into summer. You may notice that it's getting cooler in Aust. In the US, April marks the start of driving season. Petrol/diesel retailers would normally have stocked up by now. However this year I don't think US citizens will drive very far at all.

My selection of OOO was in response to the selections of the inverse ETFs BBUS, BBOZ. The Saudi's will do what they like, when they like to the POO. I had to comment on OOO in this thread as there wasn't a stock specific thread for OOO.

I don't the POO will go much lower, however the general market selloff has proven me so very wrong.

 

[PZ99]

When the Saudi's draw their trump card, the POO will hit the fan.

 

[Smurf1976]

When the Saudi's draw their trump card

What are you expecting them to do?

 

[rederob]

If oil demand is decreasing, as we can be sure is presently happening, and producers are in a price war which is "won" by outproducing each other, the very simple question is "where will it be stored?"

 

[Smurf1976]

There's not a lot of detail given but the following link suggests a circa 20% or 20 million barrels per day drop in oil consumption due to the virus.

https://www.offshore-technology.com/news/covid-19-triggers-20-drop-in-oil-demand/

If that's true then, well, um.......

With planes grounded, people quarantined, the entire tourism industry pretty much halted and so on it doesn't seem out of the question that it could be right. If so then the implications are huge - for a start Saudi Arabia could cut their oil production literally to zero, importing all their own fuel needs, and we'd still have a huge supply surplus. So no one country alone can reign that in.

This could all get rather interesting going forward and the next obvious question is about physical storage capacity. Price is one thing but if you run out of anywhere to put the oil well then that's quite a problem.

 

[ducati916]

Some of the news:

Oil has more room to fall as storage fills up. Multiple reports from analysts and investment banks see further room to fall for oil because of fears over a lack of adequate storage. “Any traders with the capacity to store oil are probably putting their hands up, looking at the contango,” Stephen Innes, chief Asia market strategist at Axicorp Ltd., told Bloomberg. “Oil could head to $10 to $15 a barrel very quickly” if OPEC and Texas can’t reach an agreement on cutting production.

OPEC speaks with Texas RRC. OPEC Secretary-General Mohammed Barkindo spoke with Texas Railroad Commissioner Ryan Sitton, raising speculation about mandatory cuts in Texas. “Just got off the phone with OPEC SG Moh[ammed] Barkindo. Great conversation on global supply and demand,” Sitton said on Twitter. “We all agree an international deal must get done to ensure economic stability as we recover from COVID-19.“ The Texan official said the OPEC chief had invited him to the next meeting of the organization in June. Most analysts see such a Texas-OPEC deal as highly unlikely.

U.S. sends envoy to OPEC. The Trump administration will appoint Victoria Coates as a special envoy to Saudi Arabia on energy issues, in an effort to negotiate an end to the price war.

Russia’s weaker rouble helps sustain price war. Russia’s currency has lost 20 percent of its value in the past three weeks, a trend that cushions the blow for Russian oil producers as it deflates costs. Saudi Arabia has to defend a fixed exchange rate.

U.S. airlines prepare for total shutdown. According to the Wall Street Journal, major U.S. airlines are “drafting plans for a potential voluntary shutdown of virtually all passenger flights across the U.S.” No decisions have been made.

Oil majors cut spending. Royal Dutch Shell (NYSE: RDS.A), Total (NYSE: TOT) and Chevron (NYSE: CVX) all said they would cut capex by roughly 20 percent each, while also suspending share buybacks. Chevron said it would cut spending in the Permian in half, which would translate into 125,000 bpd less by the end of this year than previously expected. With analysts predicting $10 oil, more cuts are expected.

10 percent of global oil supply uneconomic. Roughly 10 percent of global oil supply would become uneconomic if oil prices remain below $25 per barrel, according to Wood Mackenzie. “If prices don’t rebound, the taps will inevitably be turned off or strategically choked back in some areas,” WoodMac analysts said. “The industry’s ability to keep higher-cost barrels flowing will be severely tested.”

Spending cuts could reach 70 percent. E&Ps could cut capex by 68 percent this year, relative to 2019, according to Rystad Energy.

Exxon could delay Mozambique LNG. ExxonMobil (NYSE: XOM) may delay the FID for its massive $30 billion LNG project in Mozambique. The project, which includes an LNG export terminal and offshore gas drilling, was thought to receive a greenlight in the first half of 2020. Mozambique is one of a few key projects in Exxon’s portfolio.

S&P cuts WTI forecast to $25. S&P cut its oil price forecast for 2020 by $10 per barrel since its last estimate. The firm now sees WTI averaging $25 this year, with $30 for Brent.

Refiners cut processing. Refineries around the world are reducing processing rates because of narrowing margins as demand collapses. Jet fuel margins turned negative recently.

Oil-producing countries ask IMF for help. Around a dozen oil-producing countries in the Middle East and Central Asia have turned to the IMF for financial assistance amid the collapse in crude prices. The Fund said that it was ready to mobilize its $1 trillion lending capacity to help countries in need.

Natural gas to balance before oil. The cut in natural gas production could be faster than for oil, helping to balance the market sooner. Shale gas drillers in Appalachia are reducing drilling, but the contraction in the Permian for oil drilling will also cut associated gas output. “As we move into 2021, this path of declining oil and gas production, if sustained, will likely result in an exceptionally tight summer 2021, which suggests current forward prices are not sustainable,” Goldman Sachs wrote in a report. The bank said that natural gas prices could “rally sharply” next winter.

China’s SPR can’t save oil market. China has repeatedly taken advantage of past market downturns to buy cheap oil for its strategic reserve, but this time around the rate of SPR stockpiling is expected to be half as large as previously.

Canada braces for cuts. Western Canada may need to lower production by around 440,000 bpd beginning in April as storage fills up, according to Rystad Energy.

U.S. banks could face credit issues from oil bankruptcies. Regional banks in Texas, Louisiana and Oklahoma have seen their share prices fall and may face credit issues later this year as a result of the downturn.


jog on
duc

 

[ducati916]

Russia's B/E



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duc

 

[ducati916]

Nigeria



jog on
duc