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Oil plunges below zero for first time with May contract ending

bloomberg.com

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Re: Oil plunges below zero for first time with May contract ending

#81

Post by protomyth »

fmajid wrote: post #44
drcode wrote: post #27

Earlier quoted context omitted.

This seems unlikely to me, given the low extraction costs they have for oil. I guess the biggest danger they would face is if they have to stop "paying off" their population, and this leads to an "arab spring" type of situation. But it seems even in that case they would unfortunately have the will and resources to use Syria-style brutal tactics to contain any uprising.

The limited success of their war on Yemen, despite having the 3rd largest military budget in the world, says otherwise.

Isn't there some real issues with the military being larger given the ruling family? Fear of a coup? I though they spent the money on fancy toys and not a big military.

Re: Oil plunges below zero for first time with May contract ending

#82

Post by Analemma_ »

protomyth wrote: post #75
MrGilbert wrote: post #63

I'm a software developer, which translates to being somehow smart, but I'm not that into economics: Will this have a rubber band effect? E.g., the price will skyrocket in the next 2 - 5 years, because of this?

I have my doubts. TX and ND can reopen wells pretty quickly, so there is a max limit on the price going up. Plus, fracking efficiency is going to go up with better techniques.

They can, but there is a question of whether they will. Even before coronavirus Wall Street was getting annoyed at how US fracking seemed to be a money pit with no ROI; these producers may not find it easy to get the capital they need to restart production.

Re: Oil plunges below zero for first time with May contract ending

#83

Post by andruby »

MrGilbert wrote: post #63

I'm a software developer, which translates to being somehow smart, but I'm not that into economics: Will this have a rubber band effect? E.g., the price will skyrocket in the next 2 - 5 years, because of this?

> I'm a software developer, which translates to being somehow smart

* citation needed (I'm also a software dev)

On topic: I did actually study economics, but that doesn't help much in answering your question. As often: it's very hard to predict. Probably the current price of the future contracts are artificially low because it's more expensive to take delivery. So they are much more affected than the real prices. the real prices will fluctuate, but probably less than the future prices.

Prices could stay low, but there's a higher probability that they'll return closer to the mean after the calamities and short-term effects subside.

Re: Oil plunges below zero for first time with May contract ending

#84

Post by lonelappde »

somebodythere wrote: post #72
lonelappde wrote: post #54

I understand that it's hard to stop oil production, leading to pileups. But even after 2 months it's still unstoppable?

Nobody wants to cut production, unless everyone else does so too. Otherwise they're just giving up a chunk of their revenue stream for a negligible rise in prices. It's a classic prisoner's dilemma game. Anyway, OPEC+ did cut production, a little bit. The market is saying it's not enough, at least in the near term.

Surely when storage is full you do start to want to stop production?

Re: Oil plunges below zero for first time with May contract ending

#85

Post by [deleted] »

lonelappde wrote: post #62
frankchn wrote: post #50

Note that this is for the May contract, which closes tomorrow, and anyone left with a contract then will have to actually take delivery of the physical product. Since we are in supercontango (oil storage is full, causing spot prices to be significantly lower than forward prices), I am guessing that traders who are still holding on to contracts and don’t have available storage have to unload contracts pretty quickly.…

Would they take delivery or would they pay the producers to dump it in the dirt or ocean? Oops into the ocean is cheap storage of useless oil.

[deleted]

Re: Oil plunges below zero for first time with May contract ending

#86

Post by dredmorbius »

discordance wrote: post #8
ethbro wrote: post #3

Earlier quoted context omitted.

Physics would argue otherwise.

Oil tankers are being used for storage: https://amp.theguardian.com/business/2020/apr/19/supertanker...

And the existing fleet is rapidly being saturated. Building new tankers to serve as floating storage is economically unfeasable (negative ROI), though repurposing idle fleet capacity is rational as a means to recover some variable costs. The activity doesn't make profit, rather, it slows losses.

Re: Oil plunges below zero for first time with May contract ending

#87

Post by pixl97 »

protomyth wrote: post #75
MrGilbert wrote: post #63

I'm a software developer, which translates to being somehow smart, but I'm not that into economics: Will this have a rubber band effect? E.g., the price will skyrocket in the next 2 - 5 years, because of this?

I have my doubts. TX and ND can reopen wells pretty quickly, so there is a max limit on the price going up. Plus, fracking efficiency is going to go up with better techniques.

Eh, not really.

I live in Texas and had worked for a company that developed a software product for management of things like oil leases. The big issue is not the inability to re-open oil wells, it's not that hard. It's the people.

When you shut in production you lay people off. Eventually they go elsewhere. This is a big problem in oil boom/bust cycles. Getting trained operators that don't mess up the equipment or cause environmental disasters is one of the bigger problems.

Also, once shut in, the operators that survive the downturn will want to open later, than earlier. They can profit more by waiting.

Re: Oil plunges below zero for first time with May contract ending

#88

Post by pjc50 »

DevX101 wrote: post #2

Someone's going to find a creative way to store large amounts of oil and make a lot of money in a few years.

The world produces approximately thirteen billion liters of oil (83m "barrels") a day. A billion liters is a cube a hundred meters on a side. Given that it needs to be stored in a tank and not just pooled in a huge lake, that's a bit of a problem.

https://en.wikipedia.org/wiki/TI-class_supertanker store about three million barrels.

Re: Oil plunges below zero for first time with May contract ending

#89

Post by Tade0 »

MrGilbert wrote: post #63

I'm a software developer, which translates to being somehow smart, but I'm not that into economics: Will this have a rubber band effect? E.g., the price will skyrocket in the next 2 - 5 years, because of this?

Not an economist, but here's what I know:

It should, because among the factors that contributed to this pricing is the ongoing price war between major oil producers.

Shale oil has a much higher cost of extraction, achieving sustainability at ~$50/barrel. Those businesses are out of the game for now and unlikely to come back anytime soon.

Meanwhile those who are poised to survive this war of attrition will be the ones dictating the prices - at least until shale producers recover.

Re: Oil plunges below zero for first time with May contract ending

#90

Post by ajross »

MrGilbert wrote: post #63

I'm a software developer, which translates to being somehow smart, but I'm not that into economics: Will this have a rubber band effect? E.g., the price will skyrocket in the next 2 - 5 years, because of this?

No one really knows, and the answer depends on how the industry manages the downtime.

But in principle sure: storage filling up means that production needs to be halted because there's nowhere to put the oil. Production being halted means that facilities are going to be shut down, workers laid off or furloughed, and equipment mothballed. Some of those processes, as with all industry, are going to be expensive to start back up.

So if the industry doesn't (or can't, if it actually runs out of liquidity) have the agility to get things moving fast enough during the recovery, we might see a price shock in the other direction.

Or we might not. Certainly no one here is going to be expert enough to make a good prediction. But the principle is sound.

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