DISPATCHES FROM MOON OF ALABAMA, BY "B"
This article is part of an ongoing series of dispatches from Moon of Alabama
Trump is finding that other players can actually outmaneuver him in the art of the deal. (GQ/Getty Images)
Three weeks ago, when the Russian and Saudi war on U.S. shale oil started, we wrote:
In the first week of January crude oil reached $69/bl but it has since dropped to $45/bl as the coronavirus crisis destroyed the global demand. The Saudis tried to make a deal with Russia, the second largest exporter after Saudi Arabia, to together cut oil production to keep the price up. But Russia rejected a new OPEC cut. It wants to keep its production up and it will use the crisis to further undermine U.S. oil fracking production. As the whole fracking boom in the U.S. is build on fraud the move might well be successful.
Russia does not have a budget deficit and is well positioned to survive lower crude oil prices without much damage. Saudi Arabia is not.
Only a week later oil was already at $30/barrel and we predicted that it would go down to $20/bl.
On Monday the U.S. WTI oil price index reached that mark. Oil prices in other places are falling even further:
Canadian heavy crude has become so cheap that the cost of shipping it to refineries exceeds the value of the oil itself, a situation that may result in even more oil-sands producers shutting operations.
Western Canadian Select crude in Alberta dropped to a record-low close of $5.06 a barrel on Friday, according to Bloomberg data going back to 2008 ...
The corona virus crisis has led to drop in global demand by some 20%. The world production and consumption in normal times was at about 100 million barrel per day. Consumption is now below 80 million bl/d. But after the OPEC+ agreement failed Saudi and Russia both started to pump as much as they could to regain market shares. Together they are increasing their production by some 3-4 million barrels per day. All that oil has to go somewhere.
Shown are conceptual illustrations of types of oil and gas wells. A vertical well is producing from a conventional oil and gas deposit (right). Also shown are wells producing from unconventional formations: a vertical coalbed methane well (second from right); a horizontal well producing from a shale formation (center); and a well producing from a tight sand formation (left). (Credit: U.S. EPA. Assessment of the Potential Impacts of Hydraulic Fracturing for Oil and Gas on Drinking Water Resources).
Trump announced that he would use the cheap prices to fill the U.S. strategic oil reserve. But the spare room in the reserve storage at that time was only some 150 million barrels. As it can only be filled at a rate of 2 million barrels per day the topping off of the reserve is insignificant in the current market.
The oil producers at first pumped their oil into storage tanks to be sold later. When those filled up they rented supertankers to store the oil at sea. But empty supertankers are now also getting rare and the price for them is increasing:
The CEO of the world’s largest tanker owner, Frontline Ltd., said on Friday that he’d never known such demand to hire ships for long-term storage. Traders could book ships to put 100 million barrels at sea this week alone, he estimated, but even that could accounts for less than a week’s oversupply.
The only solution will be a shut down of the more expensive oil fields. Canada and Brazil are already doing it. U.S. shale producers who are bleeding cash will now have to follow.
That is clearly what Russia wants:
As soon as U.S. shale leaves the market, prices will rebound and could reach $60 a barrel, Rosneft’s Igor Sechin said recently. As fate would have it, in what many would have until recently considered an impossible scenario, a lot of U.S. shale might do just that.
Breakeven prices for U.S. shale basins range between $39 and $48 a barrel, according to data compiled by Reuters. Meanwhile, West Texas Intermediate (WTI) is trading below $25 a barrel and has been for over a week now.
The Trump administration has asked the Saudis to produce less oil but as the Saudi tourist industry is currently also dead the Saudi clown prince needs every dollar he can get. The Saudis will continue to pump and they will sell their oil at any price.
The White House is now concerned that it will completely lose its beloved shale oil industry and all the jobs connected to it.
Russia of cause knows this and a few days ago it made an interesting offer:
A new OPEC+ deal to balance oil markets might be possible if other countries join in, Kirill Dmitriev, head of Russia’s sovereign wealth fund said, adding that countries should also cooperate to cushion the economic fallout from coronavirus.
...
“Joint actions by countries are needed to restore the(global) economy... They (joint actions) are also possible in OPEC+ deal’s framework,” Dmitriev, head of the Russian Direct Investment Fund (RDIF), told Reuters in a phone interview.
...
“We are in contact with Saudi Arabia and a number of other countries. Based on these contacts we see that if the number of OPEC+ members will increase and other countries will join there is a possibility of a joint agreement to balance oil markets.”Dmitriev declined to say who the new deal’s members should or could be. U.S. President Donald Trump said last week he would get involved in the oil price war between Saudi Arabia and Russia at the appropriate time.
A logical new member of an expanded crude oil cartel would be one of the biggest global producers that so far was not a member of that club - the U.S. of A.
We now learn that Trump is ready to talk about that or other concepts:
As Ria reports (in Russian) the topics of upcoming phone call [between Putin and Trump] will be Covid-19, trade (???) and, you guessed it, oil prices.
Trump, who sanctioned the Russian-German Nord-Stream II pipeline while telling Germany to buy U.S. shale gas, is now in a quite bad negotiation position. Russia does not need a new OPEC deal right now. It has many financial reserves and can live with low oil prices for much longer than the Saudis and other oil producing countries. Trump would have to make a strategic offer that Russia could not resist to get some cooperation on oil prices.
But what strategic offer could Trump make that would move Putin to agree to some new deal?
Ukraine? Russia is not interested in that unrulable, bankrupt and fascist infested entity.
Syria? The Zionist billionaires would stop their donations to Trump if he would give up on destroying it.
Joining an OPEC++ deal and limit U.S. oil production? That would be an anti-American intervention in free markets and Congress would never agree to it.
And what reason has Russia to believe that Trump or his successor would stick to any deal? As the U.S. is non-agreement-capable it has none.
The outcome of the phone call will therefore likely be nothing.
The carnage in the oil markets will continue and will ravage those producer countries that need every penny while the corona virus is ravaging their people. Meanwhile the U.S. shale market will go bust.
Comments Sampler It will be interesting to see how Putin uses this. Trump is intent on attacking Iran, Venezuela and China but Putin has Trump and his beloved oil industry over a barrel. Posted by: Peter AU1 | Mar 30 2020 18:07 utc | 2 Hugo Chavez suggested a 60$ peg, saying let's not be greedy. Now will it cost too much to defend? Just thinking of our brave boys and girls defending the illegal off-shore rigs. I wish with all of the super abundance of nat gas production sea ice for desalination and then hydrogen makes all comforts possible. You're welcome,but danks B Posted by: failure of imaginati | Mar 30 2020 18:08 utc | 3 Not to worry. There is enough Covid bailout bucks to fill and over flow the poor beleaguered oil industry pockets. Wait for it. Posted by: diveshopingoa | Mar 30 2020 18:10 utc | 4 poor Iran and Venezuela; maybe saving the shale oil industry is not the top priority for everyone in the US Posted by: claudio | Mar 30 2020 18:11 utc | 5 US financial companies had a big exposure to the Shale Oil frackers. Good thing trillions of dollars of 'liquidity' has been shoveled their way. <> <> <> <> <> Lender of last resort: the unborn. !! Posted by: Jackrabbit | Mar 30 2020 18:14 utc | 6 FWIW: e.g. May 2020 CL contract=~$20, May 2021 =~$35.50. Someone or someones are betting that the crude market will improve, i.e. they are storing crude in very large crude carriers (VLCC) @>$200k per day lease cost. That is a serious commitment/bet on future price/mkt improvement. Posted by: Thomas Minnehan | Mar 30 2020 18:15 utc | 7 Long cold winters teach one how to plan, prepare, and survive. The Russians have well learned those lessons, while US elites prefer to party and spread disease at Mardi Gras and Florida beaches. Fools. The situation in Canada is interesting. For years the petro promoters have been trying to build more pipelines to deliver bitumen-based synthetic crude that no one wants, while illogically insisting that the price is low due to delivery bottlenecks. Everywhere else in the world, buyers will pay more when supply is limited, but somehow it's different in Canada. Trudope already bailed out the industry two years ago when the government purchased the 65 year old Trans Mountain Pipleline for $4.5 billion. The government claimed its intent was to expand the pipeline then sell it. What is the value of a very old pipeline when oil is $5 a barrel? Zero? I speculate it will soon be sold, maybe even back to the original owners, hehe. p.s. I know something about long cold winters; I am still looking at 2 feet of snow, and more on the way. But it will be meteorological spring in three weeks when the average low temperature rises to 32F. Posted by: Trailer Trash | Mar 30 2020 18:27 utc | 8 Unmentioned is the connection between Fracking Fraud and the Bond Market Bubble with Congress actively intervening/abetting the Fraud by providing more money to the Ponzi Scheme. Love it, b. Thank you for making it clear to me. For Trump to succeed and truly MAGA, he would have had to convince the American public that systemic changes were both needed and were going to hurt at the outset of his presidency. Instead, he took the lazy, easy road and has come to a dead end. To what end would a man like Trump try for reelection when what he will lead is in absolute shambles by the end of the year. Then he will have to really wound in order to heal. Maybe he realizes this and is just looking to get his foot in the door of another four years. Bahhhhh. Probably not. Posted by: Nemesiscalling | Mar 30 2020 18:38 utc | 10 Well, Trump does have a Trump card (I know). What if the conversation with Putin goes like this: DT: You know I hear a lot of people would like to not have any more problems with Erodgan. VP: What do you mean? DT: Erdogan is bugging me to help him out in Syria. What should I do? VP: What do you mean? DT: It would be really nice if I had a good reason not to help him, capeesh? VP: Oh. DT: I hear a lot of people want their oil in Syria. VP: Oh. DT: I hear a lot of people would like Iraq to be left alone. VP: Oh. DT. Anything you can help out with in the oil markets? Pax Americana: Between Iraq and A Hard Place Trump has a lot of leverage. Posted by: Kali | Mar 30 2020 18:38 utc | 11 Gas? Posted by: Stonebird | Mar 30 2020 18:38 utc | 12 Kali If it were Iraq and Syria threatening Trump's fracking industry then he would have leverage, or at least something to make a deal with, but in this case if any were offering a deal, it would be Putin offering to ease up on US fracking if Trump pulls out of those countries. Russia can allow the situation in the Middle east to stay as it is for quite some time if necessary, whereas Trump's frackers need prices up very fast. Trump has nothing to bargain with and will have to pay top dollar for whatever he wants from Russia. Posted by: Peter AU1 | Mar 30 2020 18:54 utc | 13 "but as the Saudi tourist industry is currently also dead the Saudi clown prince needs every dollar he can get." By "Saudi tourist industry" you must mean pilgrimages to Mecca for Hajj and 'Umra. Anything else is insignificant. Posted by: Laguerre | Mar 30 2020 18:59 utc | 14 But if the Russians want to delay the startup of the Gas line - the weather is playing into their hands as it is freezing cold in the EU at the moment, and Madagascar would be warmer. (and out of Covid-19?) Posted by: Stonebird | Mar 30 2020 18:38 utc | 12 Maputo (not Madagascar) was the last port that Akademik Cherskiy visited. Because Maputo is very close to RSA, the vessel is approaching Cap of Good Hope. This route may be more auspicious than Red Sea and Mediterranean if you are afraid of sabotage. Posted by: Piotr Berman | Mar 30 2020 18:59 utc | 15 According to the statement, Trump told Putin about the difficult situation in Venezuela and stressed the importance of a democratic transition in the Latin American country. (Sputnik) Do I detect that Trump threatened Putin about attacking Venezuela if he didn't agree to stop pumping? Silly move (or maybe desperation?). Posted by: Stonebird | Mar 30 2020 19:00 utc | 16 The US could cancel sanctions against Russia, which would be a win-win. And what if Iran were to flood the oil market as well? Posted by: farm ecologist | Mar 30 2020 19:01 utc | 17 Just watched an interesting talk by Harris Kupperman. Posted by: c1ue | Mar 30 2020 19:04 utc | 18 The 80's are calling ... There are Americans (maybe I'm an American't) who think it's the 1980's 1. Reagan / Saudi's destroy Russia's oil revenue ... 2. Bush arrests Manuel Noriega ... Posted by: Christian J Chuba | Mar 30 2020 19:08 utc | 19
The only numbers looking good in the US at the moment is confirmed coronavirus cases. Hospitals swamped with dying patients may cause Trump enough domestic headaches that he wont launch attacks on Iran or Venezuela.
One aspect of the crude complete collapse is to keep an eye on futures and the serious contango at the moment: contango=prices on future contracts are higher than current contract.
A couple of weeks ago there was a small news item that "the Russian pipe laying ship, expected to complete the North stream 2 project, was seen "off course" and heading to Madagascar" I didn't know what to make of it then and still don't. But if the Russians want to delay the startup of the Gas line - the weather is playing into their hands as it is freezing cold in the EU at the moment, and Madagascar would be warmer. (and out of Covid-19?)
1) He estimates the "excess" crude oil could go to 2 or 3 billion barrels, even disregarding production increases
2) "steady state" back to normal would see perhaps 5 million barrels/day demand beyond capacity
3) Old tankers - more than 10 years old - are returning 4x capital in 1 year due to $11 contango
4) Newer tankers - charging $300K/day. Literally unprecedented. Returning 150% capital in 1 year @ $100K/day.
Basically, the huge crude oversupply isn't going away any time soon.
And tanker company stock are valued at 1/2 NAV...when a $25M old tanker can yield $20M cash in 1 year.
Note: Strategic Petroleum reserve is a rounding error compared to the magnitude of the surplus...
https://jamestown.org/program/russians-grapple-with-oil-price-war-at-a-time-of-pandemic/
"The timing could not have been worse for Russia to provoke a spat with Saudi Arabia over oil production quotas in early March...." [ you can guess how the rest of this gem continued and you would not be disappointed. Russia collapses 2.0 ]
I still cannot get over William Barr having the gall to indict Maduro. Even the most dimwitted fraud on cable TV has to see through this charade, oh wait, I am talking about Brian Kilmeade and Sean Hannity, never mind.
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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. 
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This is what defeat looks like, when every available option is bad.
Posted by: Trisha | Mar 30 2020 17:33 utc | 1