Negative Prices Mark The End Of U.S. Shale
DISPATCHES FROM MOON OF ALABAMA, BY "B"
This article is part of an ongoing series of dispatches from Moon of Alabama
Pretty soon these mastodon ships and equipment of the oil age may become worthless, and serve only other purposes or be consigned to the refuse heap of humanity. While there will be pain in some quarters, including nations like Venezuela, for the sake of the planet it can't come too soon. For over 100 years oil has driven wars and meddling across the globe, been a motivator and gangster tool of US foreign policy, and done incalculable damage to our environment.
[dropcap]S[/dropcap]ome companies had taken on the obligation to buy a large amount of West Texas Intermediate crude oil at a certain price. The price offered by the sellers looked cheap at the time when the contracts were signed. The settlement date of the contracts was April 21.
Usually such contacts are settled in money but this time the sellers insisted to physically delivery the oil to the buyers.
That was a problem. The buyers did not have the storage capacity to accept the oil he had bought months ago. They now had to accept a large amount they could not put anywhere. The only way out was to immediately sell it to someone else. But nobody was interested. All had their storage capacity already filled to the rim. The companies with the obligation to accept the oil from the producers then offered to pay others to take their oil.
When the price started to go into negative territory I offered extra storage:
Moon of Alabama @MoonofA - 18:09 UTC · Apr 20, 2020
If you give me 50 bucks, I'll let you fill up my car.
Quoted Tweet
Bloomberg @business · 17:51 UTC · Apr 20, 2020
BREAKING: Oil drops below $1 a barrel https://trib.al/l9YLU35
Offering to take the oil at -$50 was a bit too greedy. The WTI May option contract closed out at -$37.
For the first time in memory, US West Texas Intermediate (WTI) oil futures were trading in negative territory on the New York Mercantile Exchange (Nymex) on Monday, and US crude for May delivery lost $55.90 over the course of the trading day to close at negative $37.63/bbl.
One insider said the drastic drop was in part the result of the forced liquidation of a position in the futures market “at any price.” The contract has one more day to trade as it expires Apr. 21. The May contract had an exceptionally high open interest of 109,000 contracts at the start of Monday trading.
But fundamentally, the price reflects extremely distressed crude cargoes that are stranded with refineries ramping down runs, as they cannot sell products in a market where demand has collapsed from consumers who are staying home to prevent the spread of the Covid-19 pandemic.
The steep negative price “means storage is full,” said Albert Helmig, CEO of consultancy Grey House and former vice president of the Nymex.
Cushing is the delivery and pricing point of US oil futures and has an operational capacity of some 70 million barrels of oil. It held 55 million bbl last week.
Several large consumer countries are in lockdown. Global air travel is down by more than 80%. There is only little demand for gasoline or other refined products.
The WTI benchmark, which reflects the price in landlocked Cushing, Oklahoma, was not the only trade index in trouble. West Canadian Select oil also traded in negative territory. Contracts for WTI deliveries in June were still positive at $20/barrel as were Brent oil contracts ($25/bl) which reflect delivery at sea.
U.S. shale oil producers have already cut back some of their production but they will have to cut much more. The Baker Hughes count of active U.S. oil and gas rigs fell from more than 1,000 active rigs last year to 529 active rigs on Friday. I expect it to drop below 100 during the next few weeks.
More drilling will have to stop because the refineries simply can not sell their products:
The trainwreck in Cushing is the result of various factors coming to a head. Refiners are cutting runs faster than upstream players can shut in production, and differentials have been signaling oil to go to Cushing for weeks, even prompting some midstream operators to reverse infrastructure.
In addition, market sources say that inexperienced traders hold high positions too close to expiration, and that some contracts stipulate average prices for trades ahead of expiration.
When a futures trader holds a position this close to expiry, chances are high they will need to deliver physical crude. They can do so via an exchange futures for physical (EFP) arrangement, one trader said, but that requires finding a physical player willing to take delivery.
This means that even under normal circumstances, there is a reconciliation between physical and futures prices close to expiry. And physical prices have been underperforming so-called paper barrels for the past several weeks, reflecting fundamental dynamics and causing that reconciliation to be abrupt and violent.
It costs about $45/bl to produce shale oil. No U.S. shale producer is currently in profitable territory. All are already highly indebted. They still hesitate to shut down their wells. Once shut down the wells tend to clog up. They will need expensive rework to be reopened. That is unlikely to be profitable during the next two to five years if ever.
The stone age did not end for a lack of stones. The oil age will not end for a lack of oil. Oil demand has probably seen its global peak. Alternatives have been developed. The pandemic will likely be with us for some two years. It will change the behavior of many people.
There is no reason to expect crude oil to ever again reach its previous peak price of more than $100/bl.
The total debt of U.S. shale oil producers is estimated to be above $200 billion. None will be paid back. The carnage may well lead to collapses in the banking system.
All countries which have their budgets depending on oil sales are now in deep trouble. As they lose their importance as producers and consumers the global policies around them will also change.
The pandemic only amplifies the existing structural problems and imbalances in our markets and societies. It is likely to leave permanent marks on them.
Posted by b on April 21, 2020 at 8:01 UTC | Permalink
When it takes the equivalent of one barrel of energy to produce one barrel of energy it will be lights out.
Some have spoken a lot about petrodollars and the US's need to make sure oil is traded in dollars. This is supposedly why the US invaded Iraq and destroyed Libya...they both had the idea to use other currencies.
now that oil can't be given away for free what will happen to all those dollars floating around the earth?
if someone who understands how this all works can offer some insight, I for one would be very grateful
Posted by: dan of steele | Apr 21 2020 8:25 utc | 2
Bigger picture: "UN recognized" Tripoli gov + Erdo making progresses against Heftar again. Erdo in Brussels 6 weeks ago. Officially he was "summoned" because of his use of the migrants against Greece and the EU, but in fact he was probably offered a juicy deal.
Nice covid smokescreen, no wonder they let it develop until it was too late to hide
https://apnews.com/7ea9da6e5943ac9c5c03fa02c88db21c
This event in Lyon provoked one of the biggest clusters (the so-called Auvergne-Rhône Alpes) next to the evangelical one-week gathering in Bas-Rhin region. Someone here said "in some regions" of France you can't go out without a written letter (printed or made) with 1 of the 3 reasons allowing you daily to go out, but it is everywhere in France.
Posted by: Mina | Apr 21 2020 8:42 utc | 3
@dan of steel #2
Regarding Dollar there is some info @ saker..
https://thesaker.is/no-the-Dollar-will-only-strengthen-post-corona-as-usual-its-a-crisis-after-all/
http://thesaker.is/strengthening-the-us-dollar-comments-on-ramin-mazaheri/
Posted by: ARN | Apr 21 2020 8:46 utc | 4
dan of steele
Learn about Eurodollars. Understand why USD is rising against most currencies. Learn why Yuan is not freely convertible.
The US banking system is the one of the best capitalized banking system today. Check out how well capitalized the Chinese banking system is? Or the European. Understand why Deutsche Bank is trading at the bottom of the barrel?
Posted by: ab initio | Apr 21 2020 8:47 utc | 5
Posted by: ab initio | Apr 21 2020 8:47 utc | 5
In the US the debt bubble moved from the banks to the corporate sector, it is now at an all time high.
Moreover, for the US economy to run, even in good times trillion dollar deficits are needed.
This year, it needed 19 % budget deficit and 2 trillion Fed balance sheet expaansion in order to simply stop the US economy from collapsing.
Posted by: Passer by | Apr 21 2020 9:32 utc | 6
@dan of steel #2
Another one from another point of view..
https://www.strategic-culture.org/news/2020/04/20/revolutionary-times-and-systemic-collapse-the-system-cannot-handle-it/
Posted by: ARN | Apr 21 2020 10:01 utc | 7
What -$37/bbl oil means to you:
Oil futures paper contracts market (in normal times of stable->rising oil prices and plenty of tank storage capacity a simple safe "buy low, hold, sell high" investment vehicle used heavily by investment banks, hedge funds, ETFs and teachers', municipal employees', etc, retirement/pension funds) explained in 5 minutes by Chris Martenson starts at ~minute 35:00:
https://www.youtube.com/watch?v=R8Pv77R3g1E
Posted by: gm | Apr 21 2020 10:36 utc | 8
'Peak' oil?
Peak oil Glut.
How did someone make such an error and probably pocketed millions making it?
It was always bilge....
The energy equivalent of global warming?
Posted by: Emily | Apr 21 2020 11:43 utc | 10
- The silver/gold ratio took a HEAVY beating today. Doesn't bode well for the financial markets ..................
Posted by: Willy2 | Apr 21 2020 11:51 utc | 12
Similar to dan of steele's question, is inflation going to be a possible concern?
Posted by: Scotch Bingeington | Apr 21 2020 11:56 utc | 13
Thanks b. This looks like an interesting study on how derivatives can be unwound.
Posted by: financial matters | Apr 21 2020 12:03 utc | 15
Can't wait for my local Oil Company's offer to fill my home heating oil tank for free.
Posted by: Enrico Malatesta | Apr 21 2020 12:03 utc | 16
Emily, We may still be at or around peak oil. That does not mean that all of the heavily indebted countries and oil companies won't pump what's left as fast and hard as they can. Now you have to stir in a massive plunge in demand to the equation. Seems to me that all newer oil discoveries are deep sea or shale. All of which require much more energy to produce then say thirty years ago. When it takes the equivalent of one barrel of energy to produce one barrel of energy it will be lights out.
Posted by: arby | Apr 21 2020 12:10 utc | 17
dan of steele @2
The petrodollar was not in and of itself the mechanism that the US used to "export debt" and enrich itself off global trade. Rather, the petrodollar was the mechanism used to lock-in the US$ as the global reserve currency. If you wanted oil, you needed US$. After that it was just convenient to use US$ for other internationally traded commodities as well. Of course, this made even more sense way back in the distant past of the middle of last century because most of the international trade in manufactured goods was for American products, for which you'd have to use dollars to buy anyway.
The empire fanbois will cook up all kinds of explanations for why the dollar will remain the Global Reserve Currency in order to reassure themselves of the empire's continued hegemony, but the fact is that all of the "locks" locking other countries into that regime are now gone. Countries can choose to walk away now whereas in the past that would mean giving up access to oil and no longer importing all of those awesome things that the US used to make. That is not a barrier anymore.
Posted by: William Gruff | Apr 21 2020 12:10 utc | 18
I also think that the way the US has abused the privilege of having the world's reserve currency will be the cause of its downfall. More and more it is being used as a weapon to more and more countries. This will not hold.
Posted by: arby | Apr 21 2020 12:15 utc | 19
Negative Prices Mark The End Of U.S. Shale...
...and AmeriKKKa's thuggish approach to diplomacy?
It would be fun to be a fly on the wall to hear Washington's Right-wing Cranks deciding who to blame for letting Putin get his hands on the Oil Market steering wheel...
Posted by: Hoarsewhisperer | Apr 21 2020 12:22 utc | 20
"There is no reason to expect crude oil to ever again reach its previous peak price of more than $100/bl." There's a hostage to fortune. No matter that I spent the last two years preparing for this downturn/crash, I still don't believe what is happening, people don't want to understand what's coming.
Posted by: ramon | Apr 21 2020 12:30 utc | 21
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"b" is Moon of Alabama's founding (and chief) editor. This site's purpose is to discuss politics, economics, philosophy and blogger Billmon's Whiskey Bar writings. Moon Of Alabama was opened as an independent, open forum for members of the Whiskey Bar community. Bernhard )"b") started and still runs the site. Once in a while you will also find posts and art from regular commentators. You can reach the current administrator of this site by emailing Bernhard at MoonofA@aol.com.
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
It's interesting, although terrifying, to watch the world we have all known be strangled by fear right before our eyes. Who knew so few would even put up a fight?
Posted by: In my crosshairs | Apr 21 2020 8:12 utc | 1