After a brief one-day wonder rally, and a choppy one at that, Crude is back below $20 despite OPEC, the US, Mexico and other nations agreeing to production cuts.
Yesterday, the Wall Street Journal was crowing about The Art of an Oil Deal.
President Trump has been chasing a diplomatic victory, and he got one this weekend when he brokered a deal between the Organization of the Petroleum Exporting Countries (OPEC) and Russia to limit their production that may also limit the bloodbath in the U.S. shale patch.
OPEC and Russia have agreed to curtail their production by 9.7 million barrels a day—about 10% of global output—in May and June amid a steep falloff in demand due to the coronavirus that is expected to exceed 20% of last year’s consumption.
So credit to Mr. Trump for using U.S. global influence to mitigate the mayhem. Russia and Saudi Arabia have agreed to take on the bulk of the cuts. After Mexico balked at an order to cut its production by 400,000 barrels a day, President Trump volunteered the U.S. to cover 300,000 barrels of its share.
These cuts won’t be enforced by the U.S. government and will come out of the two million or so that domestic production is forecast to fall. OPEC says sanctions on Venezuela and Iran, in addition to expected reductions by producers such as Canada, could lop off 20 million barrels a day from global supply this year, which, voila, would match demand estimates.
This math may be as illusory as a desert mirage, but it allows the Saudis to save face. And while some over-leveraged shale producers may still fail, the deal should also put the kibosh on calls for tariffs or quotas.
Deal Immediately Failed
It took all of one day for the deal to fail.
It had to.
No one is forcing the cuts and no one will, except the market, of course.
Real Deal
Here’s the Real Deal: As soon as storage facilities fill up, nations will have to curb production.
Trump did not negotiate a thing that was would not have occurred on its own by brute force of the market.
A cut of 9-10 million barrels was not enough. So the price fell after a brief market surge.
Hooray, the Saudis saved face. But what good did it do? The cuts were coming because they had to.
Voilla!
If demand destruction amounts to 20 million barrels per day, guess what?
Production will ultimately fall by 20 million barrels per day, deal or no deal.
The WSJ editorial board did get one thing right: It’s an illusion.
Mike “Mish” Shedlock
I would love to see the Clown in the White house to put tariffs on oil. It would be so comical….
Stranger things have happened to try to maintain or increase prices of certain commodities
Who makes oil storage facilities and how long does it take to crank such things out?
Variable, big, bulk storage is mainly on ships. Pretty much all, built in the same places where increasingly all things requiring organizations with enough competence to reliably and efficiently complete large projects, are located.
In California, it would take 1000 years. With the first 990 going to paying ambulance chasers to bicker with each other and with politicians and bureaucrats. Then, what they built would sink. Which would give them an excuse to go back to doing the only thing those too incompetent for real work are still qualified to do: Scream and yell, like petulant children, about “holding someone accountable.”
Low oil prices are more of a stimulus that any interest rate cut the Fed can come up with.
90% of the time these “deals” to cut production end in failure. This time around the problem is not only excess production — but a serious fall in demand! It’s a greek tragedy — you could see that one coming a mile away. I guess the dumb money moved in — since Trump has promised to reopen the economy…immediately.
Art of the Deal, baybee!
Oh, forgot to add
Sounds Inflationary
Tariffs on oil are a silly threat, 100% guaranteed to immediately backfire. I would like to suggest they are so stupid that even trump can see it, but we are dealing with Trump.
May write a post on this angle. The WSJ really missed the boat with that article
Speaking of posts and angles…PPP loans.
Showing ID at 8800+ loans approved. Which is relatively unscathed by COVID other than economic impact of shutting down (which is real impact). One bank branch in one town (114k pop) that received over 22,000 applications by last Saturday.
They aren’t even scratching the surface of demand.
Always lots of demand for free money, Covid or not.
Of course. Naturally. Reality though is businesses forced to shut down. Unprecedented. Also reality of demand and supply. And the reality that stimulus not much of a stimulus. Which is the point of my bringing it to attention and suggestion for post topic. PPP did not address 1/100th of the demand. Whether the demand is actual or perceived need…that is impossible to determine.
“May write a post on this angle.”
Didn’t read the WSJ article but would like to hear the views of someone who understands this better.
The other aspect in this…how many employers holding on to employees in hopes of PPP funding…that will now let folks go because they aren’t going to wait around for Con-gress to take a 2 week vacation and then argue for a week or two…and then another hopeful shot at keeping employees around???
Honest question here….Isn’t storage capacity going to be overwhelmed if everybody keeps pumping oil?
I would imagine usage has crashed over the past month. I was talking to an airline pilot and he said their flights have been cut by 75%. Auto traffic in my city is very, very, light. Why pump if fuel isn’t being used?
It will.
We came off a period where noone was storing anything, though. So there are buffers. But eventually production will come down. Either because people realize in-ground is the best place to store their oil assets, or because some makeshift, clandestine “storage facility” in a grain silo, swimming pool or somewhere, leaks and lead to environmental uproar.
“U..S. can’t cut its production”
…
Correct.
Three reasons why US producers will pump away:
As long as price for a barrel greater than variable cost you continue to pump. You lose money, but not as much if you stopped.
Capping and opening a well is expensive. Cheaper to keep on pumping.
Many wells are on leased land (with USG a big land holder) under favorable terms to producer. Per leases the land holders are paid royalties on what is pumped and allow only for production to be stopped for reasonable length for maintenance. If pumping stopped, leases can be voided.
“As long as price for a barrel greater than variable cost you continue to pump. You lose money, but not as much if you stopped.”
That is true – up to a point.
drilling rigs being laid over in the weeds and not even hauled back to the storage yards…painfully rapid plummet this time w/o the prep time like the 15/16 slowdown/bust
if the auctions are even open and functioning…it will be an interesting comparison as semi tractors going for 10-12k (saw 1 go for 5k) and trailers for 1k (admittedly 130k gallon capacity)
banks will probably hold the assets for the bounce back…they’ll change those regulations like everything else that is disappearing
Russia is prepared to keep pumping for a long time and all the OPEC members will keep pumping as long as they can. Sounds like it will keep going here until the producers quit paying their employees and they no longer show up or until the rig breaks down requiring an unaffordable repair.
As@flubber pointed out, there is no place left to put the pumped oil.
“As long as price for a barrel greater than variable cost you continue to pump. You lose money, but not as much if you stopped.”
Which is as it should be. It’s the marginal costs which matter. Not the sunk ones.
Or at least, in anything resembling a free market, it is. In officially sanctioned, kleptocratic usury rackets, redistributing all wealth to rent seeking, incompetent and irrelevant dead weight, is obviously the only goal.
I still expect Trump to put a tariff on imported crude. It will probably a variable one that attempts to keep the price of crude – to US refineries – at around $40 or so, enough to keep some frackers and smaller companies in business that would otherwise fail. The tariff would have to be applied, not only to oil states, but also to crude from US-owned crude oil facilities abroad. If Trump does this and balances it out with tax cuts elsewhere, I won’t even be bothered by it.
There used to be a hypothesis that anti-trust laws were needed because larger companies could undersell their smaller competitors, drive them out of business and buy them up. No hard evidence for this hypothesis ever emerged and even Ida Tarbell only touched on the notion in her “History of the Standard Oil Company”.
However, some OPEC countries really could destroy the US crude oil industry through underselling, even if they didn’t buy up what was left of it. Although I am anti-DoD (due to warmongers), much of our ‘defense’ runs on oil and it makes no sense to depend on OPEC nations for a commodity so vital.
“I still expect Trump to put a tariff on imported crude.”
…
I doubt Saudi Arabia would appreciate. The same Saudi Arabia who has 12 figure arms deals with the US.
Everything woven together globally.
Yes. The Saudis will be aggrieved and so might the MIC. However, the banks that loaned money to the oil industry will be pissed off if their loans fail and the voters will be pissed off if the banks are bailed out.
It’s very hard keep a coalition of diverse groups together as Patton was warned about for failing to mention our Russian ‘allies’ in WWII.
Shale oil should fail, it is not profitable in the market
Yes. But the OPEC countries could destroy a lot more than shale.
How about variable price support tariffs with the money going to subsidize solar, hydro, wind electric power plants AND electric cars.
Clean air means fewer deaths from lung viruses. Shocking, I know.
Less dino pee usage for motor fuel means being able to tell Mohammad Bone Saw to sod off.
“Clean air means fewer deaths from lung viruses.”
The air is clean enough now. Energy demand is collapsing and alternative energy offers no price saving at all now. Oil tariffs would help it without subsidies.
I read today, that Canadian tar sands oil is at $8 bbl.
Western Canadian Select today $4.43 Canadian Tar Sands are the biggest man made disasters in the world, the clean up is around 250 billion in Alberta, which only 10% has been put aside by the oil and gas corporation the Canadian Govt will pickup the rest. Oil and Gas in Alberta have billions of tax breaks and bail out, right now the Alberta govt gave 1.5 billion for XL pipeline and guaranteed another 5 billion
The Fed should print money and buy oil for the Strategic Reserve.
So easy, Powell could do it. If he does not do it, all those shale companies will be thrown to the wall, and unemployment will increase.
Printing limitless supply of fiat works until it causes massive problems. Why do you think this is the best option?
Didn’t say it’s the best option, but the Fed’s already buying junk bonds. Rather than buying those ultimately worthless paper, might as well buy something real.
No way. The equipment and resources of the most debt-laden companies all have to be sold off for pennies on the dollar by a bankruptcy judge to the better capitalized ones, or anyone else with the money and who is willing to get into fracking. That will make the break-even cost of those more efficient producers lower, allowing them to be more competitive.