Mexican Standoff definition: A confrontation in which no strategy exists that allows any party to achieve victory. Any party initiating aggression might trigger their own demise. At the same time, the parties are unable to extricate themselves from the situation without suffering a loss. (Wikipedia)
One of the consequences of the scamdemic is an astonishing drop off in energy demand.
At the same time, because of the debt bubble built around the domestic fracking industry, oil and gas producers have been forced to generate whatever revenue they can, even at a loss to their all-in costs or cash costs. And although well capacity can be reduced down to about 60%, any further flow reduction can damage a well. Capping a well is an expensive proposition, and so is uncapping wells.
Incredibly, the U.S. Energy Information Administration oil production estimate for the week of April 24 — five weeks after states began shutting down — was 12.2 million barrels of oil per day (bpd), which was the peak production level during 2019. Net imports were 4.9 million barrels, and exports trickled off to 2.9 million barrels a day. U.S. refiners cut crude processing to 12.5 million bpd.
There is about 1.9 million bpd of excess production at the moment.
Global oil demand generally averages about 100 million barrels per day, but the scamdemic is estimated to have cut that by around 30%, or 30 million barrels, to 70 million.
The overproduction relative to reduced demand has been so excessive that analysts expect the market to utilize all global storage capacity by mid to late May. At that point, there will be no place for actual extra physical oil to go.
Oil storage has become expensive. The Trade press reports high on-land storage costs, high rates for crude oil maritime shipping (which can be used as an alternative to on-shore storage), and high levels of contango (when near-term futures prices are lower than longer-dated ones) all reflect an increase in storage costs since early March 2020.
— USCG Los Angeles (@USCGLosAngeles) April 24, 2020
The Maritime Executive explains strange sight of 27 foreign oil tankers off the coast of southern California:
When including additional vessels in the San Francisco area, Bloomberg estimates that the idle tankers off California’s coastline contain as much as 20 million barrels of petroleum, an amount roughly equal to the (pre-coronavirus) daily demand of the entire United States. Tanker tracking firm Kpler SAS suggests that most of them have been stationary for more than a week. …
The same pattern may be found at many other large anchorages around the world. According to data from analytics firm Vortexa, an estimated 114-150 million barrels of crude oil are in storage at sea worldwide. Nearly 70 million barrels of oil products — diesel, gasoline, jet fuel and other refined petroleum — are also currently stored aboard clean tankers around the globe, the company assesses.
Small speculators using platforms like Robin Hood have piled into the USO exchange-traded fund, which in turn goes into nearby oil futures. Normally, this is a paper trade, but now producers are using this hyped vehicle to physically deliver the oil. However, neither USO nor anyone else will have the space to store oil anytime soon.
USO is the Old Maid card holder in this show down. Thus, not only can USO go to zero, but oil is likely to trade at negative prices in the expiring contracts. So once again, “somebody” will eat that “unexpected” loss.
The possible costs involved with the failure to accept physical delivery could include a combination of direct monetary penalties, reputation consequences, the liquidation of the collateral deposited by the client in the margin account with the FCM, the revocation of trading privileges, and the costs of any legal settlements resulting from the breach of contractual obligations. There is no good solution.
As this USO fund and similar vehicles blow up, the artificial speculative demand will immediately evaporate. When storage has reached max capacity, wells will need to be capped until supply reaches an equilibrium with demand.
Buddy Clark, co-chair of an energy practice at Houston law firm Haynes & Boone, noted, “It’s hard to believe that 100 bankruptcies is the optimistic view. That just shows you where we are,” adding, “I don’t think I’ve seen anything like it in my lifetime. It’s unprecedented.”
Even in the unlikely event that lock downs end across the U.S. in May, demand will not recover sufficiently to cover anything close to current supply. Consumers have little intention of going back to pre-Covid behaviors, and Wave 2.0 lurks.
About the only scenario that might save U.S. domestic supply is to “arrange” to choke off the Strait of Hormez or nearby pipelines and deliver the pain to Saudis and Middle East producers.
BREAKING: Newly discovered side effects of coronavirus include an irresistible urge to buy stocks at any price and/or valuation, an undying sense of invincibility, high levels of complacency and FOMO. pic.twitter.com/KrNuYEUjDG
— Sven Henrich (@NorthmanTrader) April 27, 2020