Last week, I wrote that the day would come soon when oil prices would take another nasty dive because there is nowhere left to store oil, causing the spot price for immediately delivery to dive toward the zero bound. This week we see how close that day is as oil continues to be oversupplied by about a million barrels a day.
Reasoning simple: When all ships, tank cars, tank trucks and tank farms are finally full, immediate delivery of oil will be nothing but a liability. That kind of delivery is called “an oil spill” because all you can do is pump it onto the ground or into the sea … or start filling swimming pools, as one oil industry analyst said is the next step. Production will have to slow to whatever the rate of consumption is, as it will become a situation of one tank used before one tank is bought.
Oil practically spills over in Rotterdam
The Wall Street Journal reported on Monday that oil tankers are backing up at the world’s largest oil seaport. In fact, buyers and sellers of oil are increasingly sending tankers on longer voyages just to avoid a pile-up of tankers at several ports.
Up to 50 oil tankers are waiting to unload cargo in the port of Rotterdam, the highest number since 2009 and another sign that, amid a glut, crude is struggling to find a home. (WSJ)
There is that magic number that appears in almost all economic news this year — “since 2009” or “since 2008,” in other words “since the worst of the Great Recession” or “since the start of the Great recession.”
Storage in Rotterdam is nearing its limits. Ships are bobbling around out at sea waiting to find a port where they can unload their crude. The world’s largest oil storage company reports that its storage tank capacity in the Netherlands is now at 96% full.
“This is a clear sign of the oversupply filling up storage to the brim,” Gerrit Zambo, an oil trader at Bayerische Landesbank in Munich, said by phone. “People are preferring to store oil rather than cut production. These are bearish signs.” (Bloomberg)
The situation in Rotterdam is exactly mirrored in the United States’ largest oil hub, which is in Cushing, Oklahoma.
“In Cushing and probably Rotterdam storage is filling up very quickly,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich, Switzerland. “In China, given high oil imports, there are too many ships and the infrastructure seems not be able to handle that.”
The result of the glut is that future prices are higher for oil than prices for immediate delivery because fewer and fewer buyers have a place to put it right now or any need right now. The final leg of this journey before prices plunge is storage out at sea in tankers that drift for months and in tank cars and tank trailers parked on side spurs and in trucking yards.
With the intentional choice of longer routes, we’re already effectively edging in that direction. Some are saying it may be a good time to be a vessel owner because you can get paid just to sit and float. The last time that approach to managing supply happened was … you guessed it … in 2008 and 2009.
Once the tanks of this world are effectively 100% full, which shouldn’t be more than a month or two, a hole will bust through the floor in the price of oil, and we’ll see an oil-industry bath in black slime.
War is good news for the price of oil, for oil producers and oil bankers
This bad news for the price of oil hit at the same time that good news for the price of oil hit this week, and the oil market and US stock market decided to focus on the good. The price of West Texas Intermediate rose to an intraday high of $34.76 per barrel, and US stocks shot up to match. The good news for the price of oil was that war took a significant oil pipeline out of production in Iraq. While that’s temporary, hopes might have risen that the increasing drum beats of war in the Middle East will mean a lot of supply lines wind up getting cut or wells wind up getting bombed.
Middle East war, of course, would be a total game changer in the oil price wars. I wouldn’t be surprised if some oil barons someplace are not just banking on it but actively laying out their war plans. (I don’t know of any such conspiracies, but it wouldn’t be the first time oil barons used war to boost the price of oil. Usually it is by increasing demand, but in this case it would boost prices by creating a drop in supply of crude.) What’s bad for one person’s crude sales, such as carpet-bombing their oil wells and sabotaging their pipes, is good for another’s whose wells are, say, in the Midwestern US. Not that anybody would do such a thing.
War is the wildcard here; but, barring destruction of oil wells or oil infrastructure by war, things are looking dark for the price of crude. (Good for the consumer of gas and heating oil, but bad for the Midwestern and Canadian oil producers as well as those up around Scotland and many other areas. In the US Midwestern oil and gas shale was almost the entire driving force in job creation coming out of the first dip the Great Recession. (The second dip — the Epocalypse — is just now forming. It’s the same recession because its all from the same cause and was just artificially lifted by unsustainable money-printing in the middle.)
Good news was bad news in the Saudi-Russia oil summit
As reported in my last article, the real news from the meeting between Russia and Saudi Arabia was that both nations agreed NOT to cut oil production, regardless of how bad the negative impact becomes on the price of oil. Saudi Arabia stated specifically that its intention is to maintain market share by making sure production keeps happening at its current rate out of Saudi Arabia until other players are forced out of business. That’s what they actually said.
Bear in mind, too, that the agreement between Russia and Saudi Arabia was not an agreement by the rest of OPEC. The energy minister of the United Arab Emirates said crude producers should freeze production, making it clear there is no OPEC-wide agreement to freeze, and Saudi Arabia and Russia said they would only freeze so long as others did the same.
One of the world’s large oil companies takes a hard dive
Mexico’s largest, state-owned company, Petroleos Mexicanos also known as Pemex, announced not only its 13th consecutive quarterly loss amounting to $9.3 billion, 44% bigger than the previous year, as revenue tumbled by 28% to $15.8 billion, but also a gargantuan $32 billion annual loss and at the same time announced it would slash capex spending to preserve cash and optionality for a future which suddenly looks very bleak. (ZeroHedge)
As a result of crashing oil prices, Pemex is cutting way back on its project development, and that’s a state-owned company, so government subsidized if need be. US companies are only subsidized through tax structures. Pemex is…
…facing short-term financial difficulties, prompting some to wonder just what skeleton will come out of the closet if the oil price remains as low as it has been… But the scariest news not only for Mexico’s largest company, but for the energy sector in general, was Pemex’ announcement that it was slashing its oil price forecast by 50% from $50 to $25/bbl…
So, the struggling oil behemoth, which had hugely overestimated prices is now slashing its forecast down to my territory, as I say $25, and for a short time perhaps a dive below $20 when we hit those days where production hasn’t slowed and nearly all tanks are full — barring any turn-around from a strategic oil war as those guys never let me know what they’re scheming.
And a wrap-up on the stock market and why I care at all about the fall in oil prices
While January was the worst in the history of the stock market by many measures, February closed as a mixed month. The Dow posted it’s first monthly gain since last November, but the S&P 500 and the Nasdaq posted their third straight monthly loss, and for once it wasn’t the first three-month decline since 2009. It was just the first since 2011.
Low oil prices are good for the consumer, and for that I am personally glad, even though prices of fuel are for some reason stuck high in the northwestern US, in spite of the huge number of refineries in this part of the world. (Must be some collusion going on to be this much higher for so many months than other parts to the nation that have fewer refineries.) Abnormally low prices, however, do mean failing junk bonds, possible bank troubles, declining energy stocks, problems for hedge funds and investment insurers, and job and housing losses in the areas that were creating the sense of recovery.
So, while I couldn’t care a fig about whether or not oil companies and banks are fat and happy for their own sake, there is no question the oil glut is contributing to the stock market’s troubles in the US and to the recession in Canada. It is, however, one of only many negative forces acting upon all economies of the world, which are collapsing due to their own deep and persistent structural flaws and the inability of politicians to see past their own faces or outside of their very limited ways of thinking.
It is merely a question of which forces are going to lean too hard against the crumbling structures of the old dinosaur economies. Right now it is the specific gravity of oil that is caving them in.