Less Than Nothing

Anderson Cooper of CNN, among others, doesn’t quite understand how Oil could suddenly (well, sort of) become worthless garbage you have to pay people to cart away.

Simple really.

Crude Oil. even the highest grades like Saudi Light and Sweet and Texas Intermediate and Brent, is a toxic and obnoxious substance. While with Soybeans and Milk you can just kind of plow them under to rot (not really a good idea because there are other Environmental concerns), dumping Crude Oil is going to get you a fine from the EPA (nah, who am I kidding?) and turn your Dump Site into a Superfund Project.

Trans Canada (now TC as if that fools anybody) refuses to die or give up on it’s Keystone XL dream but Tar Sands in Alberta are shutting down about as fast as possible. Likewise marginal U.S. Fracking Production. I would have wished it didn’t take a complete Economic collapse (which was totally possible) but the alternative was roasting in an oven, even now it is probably too late.

Oil is not valuable except for its utility, which is considerable, but you can’t eat it. This is why Bananas rule.

How bad is it?

Yesterday J.R. Ewing (who was only shot, not killed, though Larry Hagman is dead) paid $37+ for each Barrel the Department of Sanitation guys (who by the way deserve a round of applause in general) would cart away.

The overwhelming cause is Demand Drop. No Cruises, No Plane Trips, No Crossing State Borders (stupid and easy to beat, why bother?), you can see it at the Pump and the next time I stop for a Fill Up I’m going to ask the Manager how much they’ll pay me!

But there are other factors that deserve some consideration.

It’s the close of May Futures. Futures are not based on deliverable product, like everything else it’s a Casino. They will sell you as many Futures as you like so you have Chips to play with and if you don’t lose them all they’ll happily redeem them until they run out and then the Cashier’s Window is closed.

Sucks to be you, ask Unindicted Co-conspirator Bottomless Pinocchio about it.

Generally people roll over their positions into new investments so that ‘Fictional’ Oil in excess of what can be actually produced ‘Disappears’ in the same fashion as Destroyed Wealth. Somebody has money in their pocket, just not you.

But if somebody turned up on your doorstep with 10,000 Barrels of Crude Oil what the heck would you do with it? That’s 55,000 gallons or about as much as a standard 25 Yard Swimming Pool. And it stinks, did I mention it stinks?

And of course 10,000 Barrels is a miniscule fraction of the positions that were liquidated yesterday in ‘Fictional’ Oil and what those people basically did is pay so they didn’t have huge storage costs (since they would have had to accept delivery, it’s a contract) which has gone through the roof since we only have days of capacity at current rates of production and consumption.

This also means that the current situation is not going to end soon. At normal consumption we have 3 to 6 Months already pumped and floating around, now there’s really no telling how long it will take to work off the surplus.

Bad news for the Carbon Cartel but I can’t say I’m unhappy. While we may see some spot recovery this is basically the end of the Oil Business as we know it. By the time Demand for Energy rises again non-Carbon Renewables will clearly own the Market.

Too Much Oil: How a Barrel Came to Be Worth Less Than Nothing
By Stanley Reed and Clifford Krauss, The New York Times
April 20, 2020

Something bizarre happened in the oil markets on Monday: Prices fell so much that some traders paid buyers to take oil off their hands.

The price of the main U.S. oil benchmark fell more than $50 a barrel to end the day about $30 below zero, the first time oil prices have ever turned negative. Such an eye-popping slide is the result of a quirk in the oil market, but it underscores the industry’s disarray as the coronavirus pandemic decimates the world economy.

Demand for oil is collapsing, and despite a deal by Saudi Arabia, Russia and other nations to cut production, the world is running out of places to put all the oil the industry keeps pumping out — about 100 million barrels a day.

Prices went negative — meaning that anyone trying to sell a barrel would have to pay a buyer $30 — in part because of the way oil is traded. Futures contracts that require buyers to take possession of oil in May are expiring on Tuesday, and nobody wanted the oil because there was no place to store it. Contracts for June delivery were still trading for about $22 a barrel, down 16 percent for the day.

“If you are a producer, your market has disappeared and if you don’t have access to storage you are out of luck,” said Aaron Brady, vice president for energy oil market services at IHS Markit, a research and consulting firm. “The system is seizing up.”

Refineries are unwilling to turn oil into gasoline, diesel and other products because so few people are commuting or taking airplane flights, and international trade has slowed sharply. Oil is already being stored on barges and in any nook and cranny companies can find. One of the better parts of the oil business these days is owning storage tankers.

“Traders have sent prices up and down on speculation, hopes, tweets and wishful thinking,” said Louise Dickson, an oil markets analyst at Rystad Energy, a research and consulting firm. “But now reality is sinking in.”

The world has an estimated storage capacity for 6.8 billion barrels, and nearly 60 percent is filled, according to energy experts.

Some of the oil glut is evident in Cushing, Okla., a critical storage hub where the oil that trades on the U.S. futures market is delivered. With a capacity to hold 80 million barrels of oil, Cushing has only 21 million barrels of free storage left, according to Rystad Energy, or less than two days of American production. As recently as February, Cushing was not even up to 50 percent. Now, experts say it will be filled to the brim in May.

Storage is almost completely filled in the Caribbean and South Africa, and Angola, Brazil and Nigeria may run out of warehousing capacity within days.

The oil infrastructure is complicated and it’s not easy to turn off the taps. In addition, countries like Saudi Arabia and Russia, whose economies are reliant on oil, only reluctantly cut production.

Shutting down oil wells and then restarting them when demand returns can require expensive manpower and equipment. Fields do not always recover their former production. In addition, some oil companies keep pumping, even if they are losing money, in order to pay interest on their debts and stay alive.

The huge drop in prices on Monday was exaggerated by the way oil prices are set.

When traders sell oil they guarantee delivery at a future time. Normally the price differences between oil for next month and the following one are relatively minor. But on Monday oil to be delivered next month, or May, was essentially deemed worthless. Oil set for delivery in June also fell but not nearly as much — more reflective of the market’s view on the current value of crude.

A little over a week ago, there was some optimism in the oil industry. The Organization of the Petroleum Exporting Countries, Russia and other producers said they would cut 9.7 million barrels a day of production, or about 10 percent of global oil output, the largest cut ever. It was a grim acknowledgment that global demand had collapsed.

But that record cut will not be nearly enough. Analysts expect daily oil consumption to fall by as much as 29 million barrels in April, about three times the cuts pledged by OPEC and its allies, and May isn’t expected to be much different.

“It’s relatively impressive in terms of the overall number, but it’s not enough to tighten the market between now and the fourth quarter of 2020,” David Fyfe, chief economist at Argus Media, a commodities pricing firm, said about the cut by OPEC and its partners.