Oversupply vs Storage (and when do we run out of it?)

[Gerry Maddoux + 3,627]

24 minutes ago, 0R0 said:

I think there should be no response to the Saudi market flooding project. No embargo, no tariff. It is a net benefit for the US to figure out where to store oil that costs less to buy off the market than US production . If we pump it back into the ground, then so much the better to supply the country in the future. It is a gift from Saudi and the ultimate target is more Russia than the shale frackers

Right in theory. But I'm one of the folks actively involved in the shale--mostly in the Bakken but also in the DJ and Eaglebine. 

It is in our best interest to crush Saudi Arabia like the pompous stick it is. Leave them to rot. The Russians I don't really care about--they're tough people willing to suffer great hardship to make a point. 

[0R0 + 6,251]

2 minutes ago, ceo_energemsier said:

Its not easy to use old or existing wells to store oil by pumping the oil into the well. Geology is a a key factor, you maybe able to use some old depleted oil/gas conventional fields for that purpose but most of the shale fields and wells will be a problem.

Buying "cheap" Russian and Saudi oil is only going to embolden their current arrogance and they will continue the "price war and oil flood"

 

Yes, it is only intact conventional oil wells and fields that can reinject oil for storage. 

I think that it does not encourage them as this is not about the market but about the existence of OPEC+. Saudi is intent on making a point out of Russia's resistance to the mechanism that has kept oil prices elevated for decades and built up the riches of the Royal family. Russian oil companies think as businesses. Saudi thinks of a family legacy and obtaining the best prices over time. They only care little for the market share losses now, because they want to have the market share when prices are high, and are husbanding their resources. They are trying to teach Russia to stop thinking like Western businessmen and start thinking like they are stewards of  a national legacy, a buried treasure to be extracted only when you get a good price for it. It is a depleting resource. Front loading its production is not desirable. They are demonstrating to  Russia what a free market looks like, as throughout the entire past, cartels dominated oil, hardly ever allowing a market price where the cheapest production is developed and depleted first and market share predominates business considerations.

The Russian discussion keeps ignoring the history of the oil markets and maintains a fallacious myth of the market structure. They are under the impression that they are losing something from restraining production of their low cost product as short term market share of higher cost producers like shale frackers gain in the market (actually I think the price structures come out to the same net costs between Russian and shale crudes with the exchange rate bringing them up or below one another).  Saudis say that is no way to think of national resources, and that they should focus on maximizing long term benefit for the nation rather than short term bonuses and dividends for the management and shareholders while ignoring their effect on prices. 

The other aspect is that the lack of investment at times of low prices produces less capacity and brings up the prices during price spikes, which destroys demand permanently as people move to any alternative available. Thus it is important to maintain a price floor over time so that higher cost producers deplete before OPEC (and Russia) do.

While I favor the free market attitude, I can't believe Russians would if they took the Saudi perspective rather than try to take the money and run.

[0R0 + 6,251]

44 minutes ago, Gerry Maddoux said:

Right in theory. But I'm one of the folks actively involved in the shale--mostly in the Bakken but also in the DJ and Eaglebine. 

It is in our best interest to crush Saudi Arabia like the pompous stick it is. Leave them to rot. The Russians I don't really care about--they're tough people willing to suffer great hardship to make a point. 

I feel your pain, but can't see how kicking Saudi actually changes anything. 

In a free market, the low  cost producers have the greatest market share and develop their resources fastest. It is not like Saudi expanding production glacially and only now, after 30 years of discussion actually looking to develop the demilitarized zone with Kuwait. In a free market system, without a cartel, the price in real terms would have been $20 for a long time after the US ran out of conventional oil production capacity rather than rise up exponentially during the "embargo". Instead, Aramco and its OPEC partners would have used every bump in oil prices to increase production further as a normal corporations would have. They would have depleted most of their low cost oil already. The lifetime real revenue would have been a fraction of what it was in reality. Then Shale would have been a low cost competitor.

 

[Wombat + 1,028]

On 3/24/2020 at 1:04 AM, Rob Kramer said:

I have read oil barrels (the original oil storage ?) Are 17c of steel . So sold and delivered what 50c? All these companies have tons of lands cant they get US contracts on barrels and store and re sell later? Probably well worth the effort! If closing wells is better for oil producers till prices are high cant refiners or pipelines buy barrels (in barrels?) Train tankers .... ect? 

I think u have confused cents with dollars. Steel costs approx. $1000/tonne, so 50kg oil drum would cost $50?

[Wombat + 1,028]

22 hours ago, Dan Clemmensen said:

The articles I have read in the last few days computed global available storage of all types, global supply, and global demand. Available storage includes all the possible places you can put the oil, meaning all countries' SPRs, all VLCCs, all tankage, all pipelines, etc. that have available capacity. At the global level, the number I recall is 1.5 billion bbl of current available storage capacity, and the excess global supply (supply minus demand) is 20 million bbl/day. If my poor memory is correct, the world, not just the US, runs out of storage in 75 days, so we have that long to reduce supply by 20 million bbl/day. If we reduce at a linear rate, we must equalize in 150 days so every day starting now we need to reduce by another 133,400 bbl/day of production. This is worldwide. As storage cost would increase dramatically as we near capacity, it is more realistic to equalize in 100 days, so the world needs to turn off an additional 200,000 each day. I have zero knowledge of what you do to turn off an oil well. How many wells need to be turned off to stop 200,000 bbls? Do I just call up the foreman can say "Joe, turn off well # 65 today"?  After supply is reduced to match demand, the oil in expensive storage must be retrieved and sold, so new supply must continue to be reduced further, lets say at the same 200,000 bbls turned off each day until we get to (say) a supply deficit of 5 million bbl/day, until demand recovers.

Good to hear from someone who understands the math. That is why I have been saying that oil could get down to $5 or even lower. Some analysts are predicting NEGATIVE prices!

[Wombat + 1,028]

21 hours ago, Douglas Buckland said:

Guys, what I was trying to get at, is that during the past decade, or however long we have been oversupplied, we should have ALREADY run out of storage!

There seems to be something wrong with either the rate of oversupply OR the amount of storage volume available!

Doug, it may have something to do with attack on Saudi facilities 4 months ago. They had 270mb in storage, which rapidly depleted to zero, and just starting to refill now?

[Wombat + 1,028]

7 hours ago, Dan Clemmensen said:

Why spend taxpayer dollars on this? We get the same effect by letting the market do it and it's more efficient.

Not this time Dan. The "Corona Crisis" will be far more severe than the last financial crisis due to much larger levels of global debt and lower interest rate starting point. It is "every country for itself" right now and the one with the deepest pockets to do the biggest bail-outs of their industries will "win". 

[park young houn 0]

Although there are differences in the number of prospective institutions, it is estimated that COVID-19 caused a decrease in crude oil demand by about 10 million barrels per day. Considering the increased production volumes of Saudi Arabia, UAE, and Russia, more than 13 million barrels of crude oil will be surplus from April. The chances of not finding it are increasing. 
If this situation lasts for a month, the stock of crude oil of 3.9 billion barrels will increase and two months It would be 7.8 billion barrels. Even if Saudi Arabia returns all its production to inventory, more than 10 million barrels of inventory will accumulate on the market every day, That quantity actually has nowhere to go. Considering the limitations of pipeline capacity and transit time through VLCC, for two months

It seems physically impossible to increase global inventory of crude oil by more than 700 million barrels. 
And the increase in inventory that could not find a source of demand. Because of this, the burden of
inventory must be taken up by oil producers, which makes it impossible to increase inventory of more than 
700 million barrels.

In the extreme, due to storage capacity limitations, the next step is to avoid increasing inventory Dramatic and 
voluntary subtraction is inevitable. What if this doesn't happen? 

Someone is definitely lying.

[Wombat + 1,028]

3 hours ago, Dan Clemmensen said:

Thanks for this info. Nobody has mentioned it so far, so I assumed from the cost-of-storage arguments that storage is limited. If old wells can be used quickly and cheaply, the entire argument disappears. If there is a high cost or a long lag, we still have a short-term problem. What are the cost and technical tradeoffs between this approach and just slowing down pumping?

The former is crazy, the second is rational.

[ceo_energemsier + 1,818]

Bloomberg) -- Oil refiners across the U.S. are being forced to throttle back operations amid a historic plunge in gasoline demand and prices.

Plants representing more than 10% of U.S. fuel-making capacity have cut back. Exxon Mobil Corp. has slowed rates at facilities in Texas and Louisiana, while others around Los Angeles and Philadelphia are taking similar action to stem a growing glut of gasoline, diesel and jet fuel. Phillips 66 said Tuesday many of its refineries are processing minimum amounts of crude.

Refiners are acutely exposed to the financial impact of the spreading coronavirus. Orders to shelter at home are grounding flights and keeping drivers off the roads, crushing fuel demand and profit margins. Companies delayed planned maintenance to stem the outbreak, adding to the fuel glut, and now are left with little choice but to slow down.

“The refiners are struggling mightily, due to the steep drop in demand,” said John Kilduff, a partner at Again Capital LLC, a New York hedge fund focused on energy. “The poor refining margins will push companies to reduce operating rates further.”

Refineries representing over 1.5 million barrels a day of crude processing have delayed maintenance, according to people familiar with the situation. This only exacerbates a growing fuel glut that may further pressure profit margins.

Global demand is plunging, with some traders seeing it falling as much as 10 million to 20 million barrels a day at some points this year. California’s lock-down will decimate consumption in a state that accounts for about 10% of U.S. transportation fuel demand.

Gasoline futures in New York slid Monday to 41 cents a gallon, the lowest level since 1999, and traded at 48.73 cents on Tuesday at 11:09 a.m. In the Chicago wholesale market, prices were 15 cents on Monday, the lowest in data compiled by Bloomberg going back to 1992. In Europe, prices fell 20% and Exxon said it’s cutting back rates at two refineries in France.

Refiners are feeling the pain, with an index of U.S. refiners falling by two-thirds this year. Profit margins to produce gasoline have dropped below zero for the first time since December 2008, during the last recession.

“Well, demand is probably down more than 30%, so we as an industry need to run 30% less,” said Ezra Uzi Yemin, CEO of refiner Delek US Holdings Inc. “I imagine many of us already run at reduced rate because we can’t sell all the fuel.”

Some U.S. oil refiners, concerned they won’t be able to offload stockpiles of winter-grade gasoline and drain the system in time, are asking the Environmental Protection Agency to waive a June 1 deadline to shift to cleaner-burning summer-grade fuel.

One big problem -- there isn’t that much room to store the gasoline and other fuel being produced every day with stockpiles in the U.S. already at the highest seasonal level since 2017. Traders are hunting for any place to store fuel, according to Buckeye Partners LP.

Monroe Energy LLC’s Trainer refinery near Philadelphia cut rates by 40,000 barrels a day and Exxon’s Baton Rouge site reduced by just over 60,000 barrels, while Valero Energy Corp. may also cut back at some of its sites this week because of weakening demand for gasoline, according to people familiar with the matter.

Suncor Energy Inc. said late Monday it was beginning to adjust refinery utilization and pushed back its Syncrude turnaround to the third quarter from the second quarter. Phillips 66 said it’s deferring three “sizable” turnarounds to 2021.

Even an oil price war between Saudi Arabia and Russia, which has unleashed a flood of cheap crude across the world, hasn’t helped. As fast as crude prices have fallen, refined products have plunged faster.

“It is telling that the refining margins are so poor with crude oil prices this low,” Kilduff said. “Usually, cheap crude oil makes for a terrific operating environment for refiners.”

[ceo_energemsier + 1,818]

22 minutes ago, Wombat said:

Doug, it may have something to do with attack on Saudi facilities 4 months ago. They had 270mb in storage, which rapidly depleted to zero, and just starting to refill now?

The Saudi's have massive caverns built in the 80s and the 90s and more than likely into the 2000s to  store crude oil that can be drawn out in the tune of 600,000 bpd (this number could be much higher since the 90s) strategically located all over the country. So the 270 number is more than likely just their "market" supply storage for normal times.

[Dan Clemmensen + 1,011]

7 hours ago, Rob Kramer said:

Alot of "crews" young guys with sport cars driving all over canada right now .... nothing to do but drive the car you love on (mostly) empty roads and with cheap fuel. I'm stocking up on gas for boating season ... even tho its winter fuel. 

OK, let's do the math. It there are 100 million households in US+Canada, and each could store one barrel of gasoline, that would add 5 days to the world's available storage capacity. You are not helping much. Only a tiny percentage of households have any available storage capacity.

[Rasmus Jorgensen + 1,169]

On 3/24/2020 at 5:33 AM, Gerry Maddoux said:

At this point, due to the grossly inappropriate actions of a Saudi prince pumping hard during a time of a global catastrophe, the United States should adopt protectionist policies.

What about the grossly inappropriate actions of the RRC not enforcing existing regulations the past 10 years ? 

[ceo_energemsier + 1,818]

Bloomberg) -- Two of the world’s biggest oilfield service companies are warning of a bigger shale crash than the one that hit the U.S. and Canada just five years ago.

While the decline in North American drilling rigs could approach the lows seen in 2016, the drop could be much faster this time around, Schlumberger Ltd. told analysts and investors Tuesday on a webcast hosted by Scotia Howard Weil. And as the most financially troubled oilfield service providers seek to stay afloat, there’s not much help this time around, Halliburton Co. said on the same webcast.

Investors cheered plans by both companies to significantly slash spending. Halliburton soared as much as 33% for a history-beating advance, while Schlumberger climbed 11%.

“Wall Street is shut to the industry,” Lance Loeffler, chief financial officer at Houston-based Halliburton, said during the webcast. “There is no more lifeline. Financial markets aren’t lending their support.”

Halliburton, which generates most of its business in the U.S. and Canada and leads the world in fracking, is planning for the possibility that nearly two thirds of rigs in the region could be shut down by the final three months of the year. Schlumberger, the world’s biggest overall oilfield services provider, said it’s slashing its own spending by as much as 30% in 2020.

North America, which has been roiled by contractions in the past, may see a sharper, more abrupt cut in drilling before the end of the second quarter, Chief Executive Officer Olivier Le Peuch said on the call.

“We’re acting sharply and decisively in this context,” he said. “It will reach in a matter of weeks the trough, where it took a year or six months to reach a trough last time.”

While changes to rig activity generally lag the movement of oil prices by several months, shale explorers have wasted no time cutting where they can. Oil drilling in the Permian Basin of West Texas and New Mexico, home to the world’s biggest shale patch, plunged to its lowest level since the nadir of the last crude-market slump in early 2016.

At its worst, the U.S. rig count could see a 70% drop over a six-month period, eclipsing the greater than 60% cut in 1986, according to Raymond James.

“We believe OFS companies and investors need to prepare themselves for activity to fall at an unprecedented rate,” Praveen Narra, an analyst at Raymond James, wrote Monday in a note to investors. “We believe that E&Ps attention to free cash flow, as well as several with credit issues, will force spending reductions that are far more drastic than in previous downcycles.”

[Rob Kramer + 696]

19 hours ago, Wombat said:

I think u have confused cents with dollars. Steel costs approx. $1000/tonne, so 50kg oil drum would cost $50?

Your correct....  I thought they were way lighter empty but due to stacking they have some pretty thick sidewalls . Cheapest i found from a wholesale was 24$ reconditioned lol ... cost more than the oil inside them! Who'd have thought! 

[Dan Clemmensen + 1,011]

Here is a rough-order-of-magnitude analysis of demand drop. Please plug in your own numbers, as I more or less made my numbers up. The US consumes about 10 million boe/day for gasoline. Let's assume that each worker will be affected by lockdowns for about 13 weeks this year. Not all at the same time, but state by state, usually. let's further assume that this will reduce driving by 50% during that 13 weeks. it will also affect the overall economic activity and therefore the consumption of other oil products, (e.g. jet fuel) but gasoline it the big one and this is, after all, a crude analysis. OK, this means that in the US alone, we will have a demand drop of about 5 million boe/day for 13 weeks, or an average of 1.25 million boe/day for the year, or roughly 12.5%. This is just in the US, and it assumes the economy will rebound instantly after the lockdown ends. I take this as a minimum. Worst case based on my very limited personal observations, gasoline usage will drop by more than 50%, the economy will not recover instantly, and effects in other countries will on average be worse than in the US. This means that the pessimists who predict a 20% global drop in demand for crude oil may be correct.

[Dan Clemmensen + 1,011]

7 hours ago, Rob Kramer said:

Your correct....  I thought they were way lighter empty but due to stacking they have some pretty thick sidewalls . Cheapest i found from a wholesale was 24$ reconditioned lol ... cost more than the oil inside them! Who'd have thought! 

Due to the square/cube law, the amount of steel needed per volume of oil goes down as the container size increases. The same amount of steel built into a big AST or a VLCC will hold a heck of a lot more oil. Also, if you have ever tried to move fluids into and out of an oil drum you will realize that it a labor-intensive process.

as an example, a VLCC carries 3 million bbl and costs 120 million dollars. That's $40/bbl.

Edited March 26, 2020 by Dan Clemmensen
Add example

[ceo_energemsier + 1,818]

Bloomberg) -- The U.S. oil market is displaying worries that stockpiles are going to run out of storage space, with futures being whipsawed as a growing glut counters economic stimulus measures.

While crude in New York rose for a third day as the U.S. made progress on an economic aid package, the so-called WTI cash roll traded down at the lowest level since December 2008 on expectations that inventories at the delivery point for U.S. futures would balloon in coming weeks and months. Gauges of the physical market for actual barrels of crude are also pointing to weakness.

The WTI cash roll, which traded down to -$6.50 a barrel Wednesday, allows traders to push long positions forward to later months or cover short positions in the three days following the expiration of the prompt New York Mercantile Exchange futures contract.

“Investors are still grappling with the magnitude of decreased demand,” said Nick Holmes, portfolio manager at Tortoise. “Combine that with more supply hitting the market, it creates severe dislocations across oil markets. There’s a lot of uncertainty about how long demand will be depressed and at what levels.”

As the coronavirus pandemic locks down swathes of the world, concern over the hit to consumption is mounting. The head of Vitol Group warned demand is decreasing and will shrink further as India enters a lockdown.

In the U.S., lawmakers struck a deal to provide $2 trillion of spending and tax breaks. That, along with massive refinery production cuts, supported gasoline futures in New York, which surged 23%. The price jump was enough to push the crude-to-gasoline spread back into positive territory for the first time this week.

American leaders also took a stronger stance with Saudi Arabia amid its price war with Russia. Secretary of State Michael Pompeo spoke to Crown Prince Mohammed bin Salman, urging him to “rise to the occasion and reassure” energy markets at a time of economic uncertainty.

The intervention comes as the global crude surplus worsens, with a U.S. government report on Wednesday showing stockpiles rose 1.62 million barrels last week to the highest level since July. Inventories have risen for the past nine weeks nationwide and for three straight weeks at the key storage hub of Cushing, Oklahoma.

Prices:

• West Texas Intermediate gained 48 cents to settle at $24.49 a barrel in New York.
• Brent futures rose 24 cents to settle at $27.39 a barrel.

Meanwhile, funding for U.S. President Donald Trump’s plan to fill up the nation’s emergency oil reserve to help struggling drillers cope with the price crash failed to make it into the latest stimulus legislation but could return in other forms.

In refined products, the so-called 3-2-1 crack, the yield for refining a barrel of crude, reached its highest level this week, as trucking demand supports diesel margins.

 

Other oil-market news:

• As the U.S. finds itself in the unfamiliar position of lobbying for higher oil prices, China’s enjoying what amounts to a major rebate from crude’s crash just as it tries to recover from the coronavirus.
• The hired hands of the global oil industry probably will shed more than 1 million jobs this year due to collapsing crude prices, according to Rystad Energy.

 

[footeab@yahoo.com + 2,129]

17 hours ago, Rasmus Jorgensen said:

What about the grossly inappropriate actions of the RRC not enforcing existing regulations the past 10 years ? 

IS the USA an importer or exporter?  Importer.  Not one single importer is responsible for driving the price of oil down. 

[Dan Clemmensen + 1,011]

2 hours ago, footeab@yahoo.com said:

IS the USA an importer or exporter?  Importer.  Not one single importer is responsible for driving the price of oil down. 

Nope. In our current state of reduced demand, we are a net exporter unless we slow production. We were almost a net exporter in the month (December 2019) prior to Covid-19.

[footeab@yahoo.com + 2,129]

1 hour ago, Dan Clemmensen said:

Nope. In our current state of reduced demand, we are a net exporter unless we slow production. We were almost a net exporter in the month (December 2019) prior to Covid-19.

Brilliant!  China/EU are both oil exporters now! Economy is shut down but the few oil wells they do have keep pumping!......  🙄

[Douglas Buckland + 6,308]

 

• The hired hands of the global oil industry probably will shed more than 1 million jobs this year due to collapsing crude prices, according to Rystad Energy.

This will be on top of the multitude of jobs lost internationally over the past five years. When everything finally settles down and the oil industry tries to get rolling again, they will find that there are essentially NO experienced hands available in ANY of the oilfield professions or trades.

The guys and gals with the serious experience, who are self starters and would be able to get a project going from the ground up will have retired or moved to another industry to get a paycheck and will likely not jump back after this slump.

The industry is swiftly running out of human capital.

Edited March 26, 2020 by Douglas Buckland
Typo

[BJblue + 12]

D

Edited March 27, 2020 by BJblue