Naturally, output will shrink and demand will meet.

[Olivier + 5]

The oil market is exactly the same as any other market.

Demand is gone and production will hit the ground. Inventories are 1 month away from full position, especially in the downstream side. Refineries need to calm down on their pace as their opex / bll must stay very low for them to secure the long run.

Only profitable oil producers (mainly located in the Middle East), under 10 USD/bbl selling price, will carry on producing for quite a while. This until oil inventories are gone, vanished and some wells turn profitable again, once oil price rises again.

The short term big winners of that game are giant reservoirs' owners. By adjusting one valve, they can increase production.

Others will need to run some well tests, probably middle to heavy works and sometimes Capex in order to initiate production again and bring back wells to life... and that kills the economics of most marginal, and not so marginal oil producing countries.

 

Edited April 27, 2020 by Olivier

[Olivier + 5]

Hello Guys,

 

I just vow a lot of admiration for the oil industry for which I worked quite a while in the past.

I am based in Cape Tow South Africa now and used to work mainly for South America producing assets.

I am mainly focused on logistic issues, economics of oil fields and i like to give analysis of what could be hidden behind the big decisions oil actors are making....

Happy to possibly contribute to your various discussions.

[wrs + 893]

36 minutes ago, Olivier said:

The oil market is exactly the same as any other market.

Demand is gone and production will hit the ground. Inventories are 1 month away from full position, especially in the downstream side. Refineries need to calm down on their pace as their opex / bll must stay very low for them to secure the long run.

Only profitable oil producers (mainly located in the Middle East), under 10 USD/bbl selling price, will carry on producing for quite a while. This until oil inventories are gone, vanished and some wells turn profitable again, once oil price rises again.

The short term big winners of that game are giant reservoirs' owners. By adjusting one valve, they can increase production.

Others will need to run some well tests, probably middle to heavy works and sometimes Capex in order to initiate production again and bring back wells to life... and that kills the economics of most marginal, and not so marginal oil producing countries.

 

What about the cell phone industry, seems to me you can produce them and store them easily.  Doesn't seem so obvious to determine how many surplus phones that AAPL has made and how they are not selling what they produce or anything close to it.  I wonder how long it's going to be until we learn the truth about the rest of the companies swimming naked out there.

[Olivier + 5]

Very interesting question regarding the cell phones;

Note the demand for them is very high and customers still pay any price for an iphone of last generation.

Once people will be fed up with the Iphone 5S (now probably 50% of the price of an Iphone 8), they won't even buy it or use it even though price goes down to 1 USD like Motorola did crash a few years ago.

Oil market and phones markets are the same, in a way, except that the brand  new oil barrel is pretty much the same as the old one....The only differentiation in the oil market seems however to be the opex per barrel. Cheap oil will be the only sexy oil for quite a while... Would you agree ?

[Olivier + 5]

15 minutes ago, wrs said:

What about the cell phone industry, seems to me you can produce them and store them easily.  Doesn't seem so obvious to determine how many surplus phones that AAPL has made and how they are not selling what they produce or anything close to it.  I wonder how long it's going to be until we learn the truth about the rest of the companies swimming naked out there.

Very interesting question regarding the cell phones;

Note the demand for them is very high and customers still pay any price for an iphone of last generation.

Once people will be fed up with the Iphone 5S (now probably 50% of the price of an Iphone 8), they won't even buy it or use it even though price goes down to 1 USD like Motorola did crash a few years ago.

Oil market and phones markets are the same, in a way, except that the brand  new oil barrel is pretty much the same as the old one....The only differentiation in the oil market seems however to be the opex per barrel. Cheap oil will be the only sexy oil for quite a while... Would you agree ?

[Zardoz + 5]

Brent is going above 30+ in 3 months..take that to the bank..it won't be about supply and demand it's about self preservation

[Douglas Buckland + 6,308]

11 hours ago, wrs said:

What about the cell phone industry, seems to me you can produce them and store them easily.  Doesn't seem so obvious to determine how many surplus phones that AAPL has made and how they are not selling what they produce or anything close to it.  I wonder how long it's going to be until we learn the truth about the rest of the companies swimming naked out there.

You don’t ‘store’ cell phones so that you can sell them later. Phones are like sportbikes, once the ‘latest, greatest’ model is out, there is no market for the older models.

Oil is much different.

[notsonice + 1,259]

and production will hit the ground ???? reality is all of the producers have bills to pay and the only way to pay the bills when prices go down is to boost production. Unless there is a government subsidy to cut production, over production by each player that is in debt (which one isn't) is the only path to survival or staving off bankruptcy. The idea of planting fence post to fence post was not done to make more money in the 1920's it was to combat low commodity prices. It will take real (not the token 9 millon BPD papercut) government intervention on a global scale to get production to hit the ground. Oil prices will be at best 20 Brent until a vaccine is found and the masses are inoculated, Until then overproduction will be the rule.

[Ironflimmer + 18]

4 hours ago, Zardoz said:

Brent is going above 30+ in 3 months..take that to the bank..it won't be about supply and demand it's about self preservation

Self preservation is like pride. One cannot pay bills with pride.

If Brent will not sell at less than $30, someone else will. However, in 3 months time, supply should have been drastically reduced due to OPEC+ and all the bankrupcies and shut-ins worldwide. So your bet is not far off - but I don't believe in the self preservation theory. It is plain market mechanisms.

Edited April 28, 2020 by Ironflimmer

[Jay McKinsey + 1,490]

3 hours ago, notsonice said:

and production will hit the ground ???? reality is all of the producers have bills to pay and the only way to pay the bills when prices go down is to boost production. Unless there is a government subsidy to cut production, over production by each player that is in debt (which one isn't) is the only path to survival or staving off bankruptcy. The idea of planting fence post to fence post was not done to make more money in the 1920's it was to combat low commodity prices. It will take real (not the token 9 millon BPD papercut) government intervention on a global scale to get production to hit the ground. Oil prices will be at best 20 Brent until a vaccine is found and the masses are inoculated, Until then overproduction will be the rule.

But the only way to produce more with shale is to drill more and we know the rig numbers are falling fast.

Edited April 28, 2020 by Jay McKinsey

[notsonice + 1,259]

5 hours ago, Jay McKinsey said:

But the only way to produce more with shale is to drill more and we know the rig numbers are falling fast.

WTI production is not falling as fast as demand is falling. Oil is being stacked everywhere. How many active wells have been shut in? Cash flow is what matters. And the only way to get cash flow is to keep pumping. No one is falling on the sword and taking existing production off line unless they have no place to store it. Good luck with $10 -15 WTI it is here for the remainder of 2020.

[wrs + 893]

10 hours ago, Douglas Buckland said:

You don’t ‘store’ cell phones so that you can sell them later. Phones are like sportbikes, once the ‘latest, greatest’ model is out, there is no market for the older models.

Oil is much different.

Where did you get such an idea?  They still manufacture and sell the older models after the new one comes out at a lower price.  The new one is just the most expensive.

[Olivier + 5]

56 minutes ago, notsonice said:

WTI production is not falling as fast as demand is falling. Oil is being stacked everywhere. How many active wells have been shut in? Cash flow is what matters. And the only way to get cash flow is to keep pumping. No one is falling on the sword and taking existing production off line unless they have no place to store it. Good luck with $10 -15 WTI it is here for the remainder of 2020.

Exactly; 10-20 USD/bbl means shale oil is an economic impossibility. Covid -19 make us face tremendous new challenges. We must all adapt quickly.

[Olivier + 5]

11 hours ago, Zardoz said:

Brent is going above 30+ in 3 months..take that to the bank..it won't be about supply and demand it's about self preservation

Hello Zardoz... your bet for 30USD is fine.

Still, at this level, many will face extinction and won't manage to self preserve....

[wrs + 893]

23 hours ago, Olivier said:

Very interesting question regarding the cell phones;

Note the demand for them is very high and customers still pay any price for an iphone of last generation.

Once people will be fed up with the Iphone 5S (now probably 50% of the price of an Iphone 8), they won't even buy it or use it even though price goes down to 1 USD like Motorola did crash a few years ago.

Oil market and phones markets are the same, in a way, except that the brand  new oil barrel is pretty much the same as the old one....The only differentiation in the oil market seems however to be the opex per barrel. Cheap oil will be the only sexy oil for quite a while... Would you agree ?

It has been for a while and that is why the Permian was such a hot prospect even when oil was below $40/bbl in 2015/16.  I don't know that there is enough cheap oil (profitable below $20) out there to satisfy world demands if demand returns to 80% of normal.  That is why the oil market is so unpredictable.  Oil is discussed and treated in the financial world as though it's fungible but it's not even close.  The futures markets price oil but phones are priced by the manufacturers. 

They keep selling the old ones as long as possible because they make money on them but not as much.  Same with oil operators, they keep selling oil from the older wells because those wells usually are where the FCF is.  With phones it's the opposite, the most FCF is on the front end because they have the highest price.  However, not all consumers can afford the most expensive so the phone producers keep selling the cheaper ones, those production facilities still have to be paid for over time.

I have kids that regularly destroy or lose phones so I only buy them a $40 phone.  There is plenty of demand for cheap cell phones in the world but the profit margin is low.  Walmart sells them for instance.