Government Bailout of Oil Industry

[Gerry Maddoux + 3,627]

^

Fits pretty well with Mr. Trump's stated war on globalism, especially against those that would game the system. 

Embargoes are mostly silly and never seem to work right. 

Tariffs, on the other hand, work well in some circumstances. 

Again, it would seem that any company or country should be allowed to produce any quantity they deem appropriate. If KSA wants to sell oil to China at ten or twenty dollars, it should be of no concern to us. On the other hand, they shouldn't be able to export it to the US as they go about wrecking the market. 

This is a bluff. In three-four years, even at the current prices--and they're likely falling further if nothing is done--the KSA will be bankrupt.   

[John Foote + 1,135]

4 hours ago, Gerry Maddoux said:

Anyway, to be honest about it, Boeing is "America's airplane builder." It is too big to fail. We have no recourse but to somehow bail it out. But we should not do so with any moralistic idea that they have learned a damn thing from this. 

We will have to bail out Boeing, but the cost should be if the government funds it, the government owns it. Stockholders get the short thrift. Board members, and senior executives, it's stock that really makes their compensation so great, they get a good upper middle class pay, not much else. More like a general in the military. 

And when things are normalized, Boeing gets an IPO, and the treasury turns a tidy profit. Dam sure don't want the US government running everything over time.

The days of privatizing the profits, public eats the risk must end. In most cases that doesn't have to happen, let the company just die, don't save it.

And the fact of the matter is, we don't begin to need to spend what we do on new toys from Boeing and Northrup, etc.. 

[Dan Clemmensen + 1,011]

I don't get it. On a site named "Oilprice.com" focus on prices is understandable, but Covid-19 has completely changed the world. We hope the change is temporary. Prices become essentially meaningless when supply massively exceeds demand. In this regime, it's all about physical storage capacity. When storage capacity is exhausted, production must cease, and prices go negative until demand draws storage capacity down to workable levels. prior to January, supply and demand were roughly in balance as we amused ourselves by breathlessly analyzing tiny changes. A draw or build  equivalent to 2 hours of production in a week was headline news.  The world has maybe 1.5 billion bbl of available storage, and demand has fallen abruptly by perhaps 20 million bbl/day while production will increase(?!) a bit. 1.5 billion/20 million = 75 days, so by mid-June, we will have to stop pumping oil. The only question is which wells stop producing.

[wrs + 893]

On 3/21/2020 at 1:11 PM, Gerry Maddoux said:

^

Fits pretty well with Mr. Trump's stated war on globalism, especially against those that would game the system. 

Embargoes are mostly silly and never seem to work right. 

Tariffs, on the other hand, work well in some circumstances. 

Again, it would seem that any company or country should be allowed to produce any quantity they deem appropriate. If KSA wants to sell oil to China at ten or twenty dollars, it should be of no concern to us. On the other hand, they shouldn't be able to export it to the US as they go about wrecking the market. 

This is a bluff. In three-four years, even at the current prices--and they're likely falling further if nothing is done--the KSA will be bankrupt.   

Sooner, they are having to pay people not to work and stay home just like here in the US and without oil income, that's out of savings which they were counting on to cover the oil losses.  Reality will set in sooner than later.  

[wrs + 893]

14 minutes ago, Dan Clemmensen said:

I don't get it. On a site named "Oilprice.com" focus on prices is understandable, but Covid-19 has completely changed the world. We hope the change is temporary. Prices become essentially meaningless when supply massively exceeds demand. In this regime, it's all about physical storage capacity. When storage capacity is exhausted, production must cease, and prices go negative until demand draws storage capacity down to workable levels. prior to January, supply and demand were roughly in balance as we amused ourselves by breathlessly analyzing tiny changes. A draw or build  equivalent to 2 hours of production in a week was headline news.  The world has maybe 1.5 billion bbl of available storage, and demand has fallen abruptly by perhaps 20 million bbl/day while production will increase(?!) a bit. 1.5 billion/20 million = 75 days, so by mid-June, we will have to stop pumping oil. The only question is which wells stop producing.

Declines in shale on the order of 3%/mo will take care of a lot since no one is completing wells right now and not drililng new ones.  Layoffs are happening en-masse and the drilling won't resume this year.  I expect an 11 handle on US production by June, possibly even lower.

Edited March 22, 2020 by wrs

[Dan Clemmensen + 1,011]

16 minutes ago, wrs said:

Declines in shale on the order of 3%/mo will take care of a lot since no one is completing wells right now and not drililng new ones.  Layoffs are happening en-masse and the drilling won't resume this year.  I expect an 11 handle on US production by June, possibly even lower.

OK, but to a first approximation, US shale is less than 10 million bbl/day, so a 3% is 30,000 bbl/day. Be generous and call it 100,000 bbl/day after 75 days. That's lost in the rounding error.

[wrs + 893]

You are a digit off, that's 300,000bbl/day each month so 900,000 down March through May.  

[Dan Clemmensen + 1,011]

4 hours ago, wrs said:

You are a digit off, that's 300,000bbl/day each month so 900,000 down March through May.  

My major was applied math, so what did you expect? 🙂 However, even if the world instantly decreases oversupply by 1 million bbl/day we still run out of storage in 82.5 days. Instead we have a ramp-down from a 20 million bbl/day to 19.1 million bbl/day over the course the course of 90 days, so we run out of storage on roughly the 77th day from now instead of the 75th day. Conclusion: somebody somewhere will need to stop pumping the other 19.1 million bbl/day. They can either start now and do it gradually, or try to turn it all of at midnight on the 77th day.

[wrs + 893]

9 hours ago, Dan Clemmensen said:

My major was applied math, so what did you expect? 🙂 However, even if the world instantly decreases oversupply by 1 million bbl/day we still run out of storage in 82.5 days. Instead we have a ramp-down from a 20 million bbl/day to 19.1 million bbl/day over the course the course of 90 days, so we run out of storage on roughly the 77th day from now instead of the 75th day. Conclusion: somebody somewhere will need to stop pumping the other 19.1 million bbl/day. They can either start now and do it gradually, or try to turn it all of at midnight on the 77th day.

Maybe you aren't aware but we in the shale business have seen this movie before.  The pundits were all declaring in 2015/16 that Cushing would fill up and then what?  Well interestingly, it never happened.  I expect that if China is now done with CV that demand will begin picking up again there and offset some of the other losses around the world.  In another month the US will be past it's quarantine phase and demand destruction will have hit bottom here.  You won't see storage fill up, it never happened before and no reason for it to happen now.

People were gleefully talking about how oil would be given away and so on.  It never happened.  The worst month was February 2016 and we got $23.60/bbl that month.  That's an average price.  The dailies are not what the market operates on, all payments are on a monthly average basis.  Producers are paid 30 days in arrears and royalties are paid 60 days in arrears.  In March 2016 we were paid $30/bbl and it rose steadily from there.  This time, I don't expect the Saudis to get away with dumping oil in the US and so I don't expect our inventories to rise like they did back then.

Of course the difference then was demand, we still had plenty so the lack of demand will definitely back us up but I expect operators to also choke back their production before shutting anything in.  

Edited March 23, 2020 by wrs

[Gerry Maddoux + 3,627]

^

And, of course, this time, producers began laying down rigs as soon as the Saudis announced their ridiculous decision. I wouldn't be surprised to see the US rig count fall by one-half. Decline curves will take care of the rest. Because this is temporary.

I too believe this is 2014 Redux, including demand. I hope it's brief, but the farther this pandemic goes, the more pent-up demand. And this time drugs, ventilators, testing kits, reagents, even steel, automobiles, household items--most everything vital to American life--are going to be made in America, using American oil, not made in China using Saudi, Iranian or Russian oil.

Every economist and analyst is talking about how severely the demand for oil has been cut. Wrong! Demand for American oil has been severely cut. Before the Wuhan disaster, demand for oil was still very strong in China--they just weren't using much of our oil. With populism and America first by necessity and choice, I think the demand for American oil will soar. 

To make another analogy, what led us out of the aftermath of 2008? Oil and gas! If my postulate is correct, it will once again lead us out of what is shaping up to be one deep recession. To feed the old refineries we can get 100% of the additive heavy crude from Canada to mix with our LTO . . . and the Canadian oil industry is going to need a leg up too. By the time this thing comes to its natural conclusion, I don't think very many Americans are going to give a damn for anything made in China--and that's not being xenophobic. The Chinese are fine people; they just have horrible leadership and I also think that will change, but that's the topic of another chapter.

[Dan Clemmensen + 1,011]

As I understand it, slightly more than half of US demand is for consumer gasoline. There will be very little "pent-up demand" for this particular market segment. Instead, we will go back (I hope!) to our former demand levels. Same for jet fuel and cruise ships. There will possibly be pent-up demand in manufacturing and commercial transportation to make up for depleted manufactured product inventories, but there will also be a large overhang of excess stored crude to meet it. I'm all in favor of America first in the crude market as a counter to OPEC, but this needs to be treated carefully since we are now a net exporter.

[meto76 0]

USA should levy all customs duties on oil imports ,except for oil imports from Canada and Mexico. 

[Yoshiro Kamamura + 274]

Shale? Free market? Okay, riddle me this: It's a known fact that shale has much higher depletion rate - production drops how much, 60%?, 80%? during the first year, so new and new holes must be drilled to keep up the production flow. Basically shale burns through what is CAPEX in case of the conventional fields (where you drill once and keep on pumping for years, even decades) as if it was OPEX, so its EBITDA looks somewhat better (like a very old, wrinkled woman with tons of makeup on), but the profits (or should I say losses) are abysmal. AFAIK what I know from the press (I know you guys are insiders, so correct me if I am wrong), most of the shale players were never profitable and managed to keep going only through investors and bank loans. Now how is this possible under the conditions of the "Free Market"? Who finances unprofitable businesses by handing out loan after loan? Should not unprofitable businesses go bankrupt in free market environment, making way for those able to make a profit? And how are the massive government subsidies in the form of tax relief compatible with "free market"? Why not pardon teachers, or solar panel makers, or algae growers, or anyone tied with a resource that actually have a future?

How is it possible that a business, that was running at a loss when the oil cost 50+$/bbl is still not going under when it sinks to 20$? How?

And there are other, conveniently hidden costs in the form of externalities like all the water the drilling takes away from circulation and pollutes (I am sure whoever tries to grow something in Texas would not mind some more water), other forms of pollution, flaring of natural gas that accelerates the climate change (methane is much worse than CO2), etc. 

[JoMack + 549]

Simply put, the Democrats are off their nut.  They had to pull the funding of the SPR from the stimulus bill since the Dems tied it to their Green New Deal.  Demand airlines decrease their emissions, solar and wind mill tax credits, and on and on that have zero to do with the virus.  Anyone surprised?

 Of course, the SPR doesn't help the oil producers since they will be slowing production and trying to stay alive with $20 to $25 bbl oil.  Trump wants low oil prices to help the economy, but he opened federal lands in New Mexico for oil and gas leasing.  Obama cut the competitive lease sales to 1 a year and the industry had to deliver proprietary information to the BLM to request a lease.  So, the sale pretty much went to wild and inaccessible leases.  So Trump picked up the competitive lease sales to 4 a year but did this with bonus payments to the feds in mind.  But, now he is realizing that production may be low enough to start importing Middle East oil once again.  So, Pompeo is phoning Salman to stabilize the market.  This is the boy child is only interested in smacking Vlad, so while we know he had the journalist murdered in Turkey, since he dissed him, will he listen to Pompeo?  Definitely not.  The oil and gas industry is going to need to throw everything it has in its arsenal to survive since this may be the bullet that finally puts a dent - a big dent -in U.S. shale.