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US oil prices turn negative as demand dries up

bbc.com

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Re: US oil prices turn negative as demand dries up

#21

Post by dmix »

JshWright wrote: post #12
new_time wrote: post #7

Futures prices are significantly higher than $0. This is less noteworthy than it seems. https://www.marketwatch.com/investing/future/crude%20oil%20-...

Just because the situation is complex doesn't mean it isn't newsworthy. This is certainly an unprecedented and significant event.

It still appears more significant by the way futures trading works and the way it all bulked up to the last trading day, since there was no buyers after a certain point - because (certain) buyers were incentivized to wait until the last minute to submit orders, to get the cheapest price.

In a "real" market with physical oil wells + storage, wouldn't that decline in consumption -> storage normally happen far more gradually over time? (A drop over a week is less exciting than a down spike within 24hrs) I know it's less efficient that way and all of that, but this seems to make it appear like this drop in the market happened all at once.

A lot of non-experts will see the news this way regardless - it's slightly less exciting in context but still historic.

Re: US oil prices turn negative as demand dries up

#22

Post by mike_d »

propter_hoc wrote: post #10

So they start off the article with this statement: "That means oil producers are paying buyers to take the commodity off their hands over fears that storage capacity could run out in May." This statement is actually totally false. Producers already got paid for this production a long time ago when they initially sold the futures contract. What has actually happened is that as the expiry of the May futures contracts a…

> Producers already got paid for this production a long time ago

Nothing requires a broker to be involved. Drillers can sell futures to "get paid now" for future production, and likely did so to cover expenses in these chaotic times.

If they issued a contract for 1000 barrels on the 1st of the month, produced that 1000 barrels on the 10th, and have an unsold contract on the last day of the month - they are screwed.

Re: US oil prices turn negative as demand dries up

#23

Post by tomerico »

jliptzin wrote: post #15
User23 wrote: post #13

Earlier quoted context omitted.

> cost of storing that oil is getting really high If anything, this is a wild understatement. Each contract represents 1000 barrels of toxic waste. You can't just have that stored in a shed or something. And all the commercial regulation compliant storage is gone. I'd be willing to bet you will have a hard time even finding a tanker truck to take it to a buyer, since the tanker owners themselves are going to be using…

Forgive me if this is a stupid question but they can’t hold a gun to your head to force you to take the oil, right? Can’t you just refuse the delivery if you have nowhere to store it? Is there language in the contract for this kind of situation?

It’s likely that they’d be held liable for the costs of storage for the oil they did not take.

Re: US oil prices turn negative as demand dries up

#24

Post by core-questions »

fennecfoxen wrote: post #14
Vomzor wrote: post #11

How long would it take to build new storage tanks?

With regulatory approvals? Probably years. The smart equivalent is to get a tanker ship and just float it out at sea until someone wants the oil (usually just west of Africa, where you can easily dispatch it to whoever ends up needing it.) Not sure if it works quite as well with WTI instead of Brent crude, though.

It is probably a fair and terrible assumption that others have thought of this already and that, in fact, tanker ships are filling up all over the place right now. Statistically, this means we're more likely for a spill, somewhere.

Re: US oil prices turn negative as demand dries up

#26

Post by kyleblarson »

fennecfoxen wrote: post #14
Vomzor wrote: post #11

How long would it take to build new storage tanks?

With regulatory approvals? Probably years. The smart equivalent is to get a tanker ship and just float it out at sea until someone wants the oil (usually just west of Africa, where you can easily dispatch it to whoever ends up needing it.) Not sure if it works quite as well with WTI instead of Brent crude, though.

The cost of supertankers used for offshore storage has unsurprisingly also gone through the roof. Well over 100k USD per day.

Re: US oil prices turn negative as demand dries up

#27

Post by paxys »

fennecfoxen wrote: post #20
jliptzin wrote: post #15

Earlier quoted context omitted.

Forgive me if this is a stupid question but they can’t hold a gun to your head to force you to take the oil, right? Can’t you just refuse the delivery if you have nowhere to store it? Is there language in the contract for this kind of situation?

This sort of refusal would likely has contractual penalties associated with it. Drillers and pipeline operators can't just shut down infrastructure by flipping a switch like it's nothing; it costs real money to perform shutdown procedures or restart pipeline pumps.

I bet all the lawyers who put such clauses in futures contracts are feeling pretty smug right now. I can imagine an oil producer going "Why on earth do we need to put this in the contract? Of course they'll accept delivery. If they don't then that's great for us."

Re: US oil prices turn negative as demand dries up

#28

Post by CPLX »

maxehnert wrote: post #19

Since oil is making the front page here, if you're interested in the history of American oil industry, "The History of the Standard Oil Company" by Ida Tarbell is a fantastic read. It's also a great example of investigative journalism. In early chapters of the book she covers the initial rush to pump oil in the Oil Regions and the history of pipelines and storage facilities as it all ties into business practices of R…

Also recommend "The Prize" which is incredible.

Re: US oil prices turn negative as demand dries up

#29

Post by fennecfoxen »

core-questions wrote: post #24
fennecfoxen wrote: post #14

Earlier quoted context omitted.

With regulatory approvals? Probably years. The smart equivalent is to get a tanker ship and just float it out at sea until someone wants the oil (usually just west of Africa, where you can easily dispatch it to whoever ends up needing it.) Not sure if it works quite as well with WTI instead of Brent crude, though.

It is probably a fair and terrible assumption that others have thought of this already and that, in fact, tanker ships are filling up all over the place right now. Statistically, this means we're more likely for a spill, somewhere.

The Wall Street Journal writes today:

"Lease rates have soared for very large crude carriers, the 2-million-barrel high-seas behemoths known as VLCCs. The average day rate for a VLCC on a six-month contract is about $100,000, up from $29,000 a year ago, according to Jefferies analyst Randy Giveans. Yearlong contracts are about $72,500 a day, compared with $30,500 a year ago. Spot charter rates have risen sixfold, to nearly $150,000 a day.

Day rates rise as the spread between oil-futures contracts widens. The basic math is that every dollar in the six-month spread equates to an additional $10,000 a day that can be paid for a VLCC over that time without wiping out all the oil-price gains, Mr. Giveans said."

But there's plenty of Saudi oil going in as well.

I'm not sure that they're materially more at risk of a major spill than during normal operations.

Re: US oil prices turn negative as demand dries up

#30

Post by mike_d »

jliptzin wrote: post #15
User23 wrote: post #13

Earlier quoted context omitted.

> cost of storing that oil is getting really high If anything, this is a wild understatement. Each contract represents 1000 barrels of toxic waste. You can't just have that stored in a shed or something. And all the commercial regulation compliant storage is gone. I'd be willing to bet you will have a hard time even finding a tanker truck to take it to a buyer, since the tanker owners themselves are going to be using…

Forgive me if this is a stupid question but they can’t hold a gun to your head to force you to take the oil, right? Can’t you just refuse the delivery if you have nowhere to store it? Is there language in the contract for this kind of situation?

In this sense "barrel" is a unit of measure. The oil is physically in tanks in Oklahoma. When oil is delivered it stays in the same tank, but the ledger for the tank contents are updated.

Once delivery is made you are now on the hook for the storage costs - which are going sky high because there is no available storage inventory. You can default on your obligations to the storage company, but they will sell off whatever oil you hold to cover debts and then sue you for the rest.

When the market is functioning correctly you end up paying for a few days of storage while the oil is diverted to a pipeline where you can extract it, or it is offloaded on to your train/truck/tanker/etc.

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