OPEC Cuts Deep to Save Cartel

[Tom Kirkman + 8,860]

Entertaining and thoughtful article from Tom Luongo.  I certainly don't agree with everything he says, but his viewpoint is worth reading:

OPEC Cuts Deep to Save Cartel

With oil prices in free fall and the dawning realization that Great Reflation trade of 2017 is over, OPEC needed to do something drastic to remind everyone how important they are.

Moreover, with Qatar quitting the cartel last week it was then doubly necessary for OPEC to make the markets stand up and remember them.

So, after a few days of wrangling, a 1.2 million barrel per day cut was announced by OPEC, far larger than the market was expecting.  

The Trump administration is fuming today over this result.  

Predictably, oil prices jumped on the news.  All is right with their world, yes?

Well, yes and no.  The Saudis need $80 per barrel oil.  Russia doesn’t get its hair mussed below around $50 and even then it simply scales back government spending in line with oil prices — auto-budgeting based on oil tariffs.  ...

[Illurion + 894]

https://www.bloomberg.com/energy

No increase showing yet.

But today is Sunday.

I believe we will know whether this cut will have a real affect or not by what the above link shows WTI and Brent at on Tuesday night.

I believe the "cuts" are to phase in over the next month,  but,  i believe the OPEC Members are hoping the markets will rise simply on the "perception" that the "cuts are coming."

BUT ARE THE CUTS REALLY COMING ?

WILL THEY REALLY FOLLOW THROUGH AND MAKE THE CUTS ? 

OR ARE THESE CUTS JUST IMAGINARY ?

I have my doubts.

I still believe that they WILL NOT actually make the cuts they promised.

 

[Tom Kirkman + 8,860]

9 minutes ago, Illurion said:

https://www.bloomberg.com/energy

No increase showing yet.

But today is Sunday.

I believe we will know whether this cut will have a real affect or not by what the above link shows WTI and Brent at on Tuesday night.

I believe the "cuts" are to phase in over the next month,  but,  i believe the OPEC Members are hoping the markets will rise simply on the "perception" that the "cuts are coming."

BUT ARE THE CUTS REALLY COMING ?

WILL THEY REALLY FOLLOW THROUGH AND MAKE THE CUTS ? 

OR ARE THESE CUTS JUST IMAGINARY ?

I have my doubts.

I still believe that they WILL NOT actually make the cuts they promised.

 

jawbone (jôˈbōnˌ)

• n.
  A bone of the jaw, especially the bone of the lower jaw.
• v.
  To try to influence or pressure through strong persuasion, especially to urge to comply voluntarily.
• v.
  To urge voluntary compliance with official wishes or guidelines. 

 

And not very often you will see me linking Seeking Alpha articles, but this article from 2016 seems fitting:

 

OPEC Is Jawboning Again

 

Summary

● Oil has bounced from recent lows.

● The upside may be limited.

● Products weak.

● OPEC: Words worked last time, but they only go so far.

● The real problem for the cartel is technology.

It seems that every time the price of oil weakens, the Organization of Petroleum Exporting Countries (OPEC) starts flapping its lips. Last February, when crude oil dropped to the lowest price since 2003, OPEC members and the Russians got together in an unscheduled meeting that led to another meeting attended by a wider group of oil producers. The rumors swirling around the meetings were that the cartel together with Russia would agree to a production cut at January 2016 output levels. As those rumors circulated, the price of the energy commodity rose steadily until reaching the highs of $51.67 on the front-month NYMEX crude oil futures contract at the beginning of June. Over a period of four months, the price of oil almost doubled. While many factors contributed to the rally in oil, the rumors of a production cut by OPEC members did not hurt. 

[Marina Schwarz + 1,576]

The 1.2 million bpd is for OPEC+. OPEC's share is 800,000 bpd, they said at the press conference after the meeting. Which, to me, is even more telling: they couldn't afford to cut more, not all of them, not now.

[Rasmus Jorgensen + 1,169]

7 hours ago, Marina Schwarz said:

The 1.2 million bpd is for OPEC+. OPEC's share is 800,000 bpd, they said at the press conference after the meeting. Which, to me, is even more telling: they couldn't afford to cut more, not all of them, not now.

Probably true. And they are probably also looking to find balance. Cut too deep and other production and energy sources come online. 

[Marina Schwarz + 1,576]

I just saw today the Saudis will be cutting half a million bpd. That's quite a lot. Russia is cutting 230,000 or so but slowly because winter.

[Bhimsen Pachawry + 72]

15 hours ago, Marina Schwarz said:

The 1.2 million bpd is for OPEC+. OPEC's share is 800,000 bpd, they said at the press conference after the meeting. Which, to me, is even more telling: they couldn't afford to cut more, not all of them, not now.

 

17 hours ago, Tom Kirkman said:

Entertaining and thoughtful article from Tom Luongo.  I certainly don't agree with everything he says, but his viewpoint is worth reading:

OPEC Cuts Deep to Save Cartel

With oil prices in free fall and the dawning realization that Great Reflation trade of 2017 is over, OPEC needed to do something drastic to remind everyone how important they are.

Moreover, with Qatar quitting the cartel last week it was then doubly necessary for OPEC to make the markets stand up and remember them.

So, after a few days of wrangling, a 1.2 million barrel per day cut was announced by OPEC, far larger than the market was expecting.  

The Trump administration is fuming today over this result.  

Predictably, oil prices jumped on the news.  All is right with their world, yes?

Well, yes and no.  The Saudis need $80 per barrel oil.  Russia doesn’t get its hair mussed below around $50 and even then it simply scales back government spending in line with oil prices — auto-budgeting based on oil tariffs.  ...

OPEC is cutting supply by 800000BPD whereas Qatar is leaving OPEC. Qatar produced 600000BPD. So, does this mean OPEC is cutting only 200000BPD? Also, what if the consumption from Iran rises due to waiver from USA? What about increase in Libyan oil and Venezuelan oil which is rising? Will they compensate for the OPEC loss?

[William Edwards + 708]

17 hours ago, Illurion said:

https://www.bloomberg.com/energy

No increase showing yet.

But today is Sunday.

I believe we will know whether this cut will have a real affect or not by what the above link shows WTI and Brent at on Tuesday night.

I believe the "cuts" are to phase in over the next month,  but,  i believe the OPEC Members are hoping the markets will rise simply on the "perception" that the "cuts are coming."

BUT ARE THE CUTS REALLY COMING ?

WILL THEY REALLY FOLLOW THROUGH AND MAKE THE CUTS ? 

OR ARE THESE CUTS JUST IMAGINARY ?

I have my doubts.

I still believe that they WILL NOT actually make the cuts they promised.

 

May I humbly remind everyone that the consumer makes the cuts, not OPEC (or the other producers). It demonstrates the height of arrogance for OPEC to claim that they set production rates. And the gullible, unenlightened public buys into their claim because, they too, have not grasped the significant fact -- it is impossible to put ten gallons of oil in a five gallon bucket. The consumer determines the size of the bucket. OPEC and the other producers simply fill that bucket.

Think through this and you will look at the pronouncements from the media, the analysts, the experts and OPEC quite differently.

We can cover how price fits into all this at another time. It is more complicated to explain, but it turns out to be as simple in concept once one truly understands the fundamental forces at work.

[Auson + 123]

15 hours ago, William Edwards said:

May I humbly remind everyone that the consumer makes the cuts, not OPEC (or the other producers). It demonstrates the height of arrogance for OPEC to claim that they set production rates. And the gullible, unenlightened public buys into their claim because, they too, have not grasped the significant fact -- it is impossible to put ten gallons of oil in a five gallon bucket. The consumer determines the size of the bucket. OPEC and the other producers simply fill that bucket.

Think through this and you will look at the pronouncements from the media, the analysts, the experts and OPEC quite differently.

We can cover how price fits into all this at another time. It is more complicated to explain, but it turns out to be as simple in concept once one truly understands the fundamental forces at work.

Can you explain a glut in terms of a 5 gallon bucket ?

[William Edwards + 708]

3 hours ago, Auson said:

Can you explain a glut in terms of a 5 gallon bucket ?

The glut is the next drop after the bucket is full. The world always operates with a glut. The concept of a glut as a real entity is a manufactured and imaginary concept. No such thing exists in reality. (If you think otherwise, where in the world does it reside? Can you touch it or put a dip stick in it to measure it?) I think what the "glut" proponents actually mean is that there is more oil looking for an outlet than is provided by consumption. However, for the system to function smoothly, that condition must be the normal situation. To put it in layman's terms, think how disruptive the automobile supply system for gasoline would be if the service station carried no "glut", and you might or might not find fuel at the pump.

[Auson + 123]

1 hour ago, William Edwards said:

The glut is the next drop after the bucket is full. The world always operates with a glut. The concept of a glut as a real entity is a manufactured and imaginary concept. No such thing exists in reality. (If you think otherwise, where in the world does it reside? Can you touch it or put a dip stick in it to measure it?) I think what the "glut" proponents actually mean is that there is more oil looking for an outlet than is provided by consumption. However, for the system to function smoothly, that condition must be the normal situation. To put it in layman's terms, think how disruptive the automobile supply system for gasoline would be if the service station carried no "glut", and you might or might not find fuel at the pump.

SPR, Chinese Storage, Saudi Storage and floating storage rented by Glencore and the like. 

How is buying crude to store and not sell until the price rises not a glut ?

[William Edwards + 708]

Just now, Auson said:

SPR, Chinese Storage, Saudi Storage and floating storage rented by Glencore and the like. 

How is buying crude to store and not sell until the price rises not a glut ?

That is called "speculative storage" That differs from "operational storage", necessary for smooth operations. One portion of the "operational storage" is the provision for cargo accumulation and loadings. There is also "contingency storage" that is necessary because things break down or miss schedules. Storage has many necessary uses, the smallest of which is the "speculative storage".

"Glut" is your term, not mine. So you are free to define it in any way that you choose. There is no meaningful, inherently sound definition. It is a media-inspired term, undefined, and essentially a catch-all word that is supposed to convey some meaning suggesting impending doom for suppliers. You might wish to place it in the receptacle labeled "garbage terms".

[Jan van Eck + 7,558]

19 minutes ago, Auson said:

SPR, Chinese Storage, Saudi Storage and floating storage rented by Glencore and the like. 

How is buying crude to store and not sell until the price rises not a glut ?

"Inventory" is part of the manufacturing process.  If you are running a manufacturing plant, you need an inventory of various raw materials:  coiled steel sheet, rivets, welding rods, plastic pellets, and so forth.  As the finished goods leave the factory for the retailer, they first go (in larger shipments into a warehouse, which is inventory for the retail locations.  Then those stores in turn carry multiple finished goods for the consumer to go buy - more inventory.  Example:  think how frustrated you would be if you wanted to buy some underwear and went to the department store, and all there was was one pair.  The guy arriving three minutes ahead of you bought it, so now the sales clerk tells you that you have to wait until they phone the factory and another pair is made - just for you.   So you have inventory everywhere, in every sales channel.

In the oil business, every segment that is selling product is also carrying inventory.  The guys that pump are shipping it to some crude terminal, such as Cushing, Oklahoma, where a lot of inventory is stored, until the "factories," the big refineries, call it in.  Crude then sits at the refinery in raw-material tanks to ensure a steady supply for the cracking towers.  The various grades of material are then taken off and held in more tanks - more inventory - until it can be shipped out in some load, either a tanker or truck or railcar. It shows up at some fuel oil dealer and he takes it in again in yet another tank, then taken to your house (if you heat with oil or propane) or to the gasoline station to put in their tanks - more inventory.  And finally, since you store most of the oil product you buy, and use it only as needed in a draw-off, your car tank and house oil tank contain "inventory."   So you have a lot of inventory in the system, which allows you, the final user, to sip it off as you need it. 

Now, obviously, that huge inventory chain can be "mostly full" or "half full" or "mostly empty."  It will still function perfectly - even on "mostly empty," although you will pay this psychic price of angst and anxiety for having that heating-oil tank cruising on 1/8, and on your auto gas tank on the little flasher light that tells you that you only have another 40 miles to go before it all runs out. But it still runs just fine, in the meantime. 

What you are seeing in reaction to fluctuations in the inventory levels is human emotion, not some rational price response to working levels for the system to function.  Human emotions then in turn control what traders do in the commodities exchanges, where the primal forces of greed and fear dominate. It has nothing to do with reality. And there is where your price is set.

Although William Edwards' concept of "glut" is "one extra drop," that is a bit simplified.  "Glut" really means that all the inventory storage tanks in the system chain above are all getting totally filled, to the point that where say a tanker pulls in into the port of Rotterdam, there is no free storage in the land-side take-off and holding tanks to receive it, and the big tanker has to go "sit" for a few days until the tanks are drawn down and can again accept another shipment. In a true "glut" condition, all kinds of floating storage starts to get pressed into service.  Note that this is different from speculative floating storage, which is artificially done by trader speculators hoping for a better price in the future  (and if they guess wrong, it costs them a big bath).  Even the retail user gets into the speculation game a little bit; for example, in Germany it is common for homeowners to install these giant 1,000-gallon oil tanks that are made of high-density polyethylene plastic in giant blow-molding machines, so that they can buy their season's worth of heating oil in July or August when there is lots of distributor supply out there and the price is correspondingly lower. 

How big is the inventory chain in oil and refined products? The truth is, nobody really knows.  Nobody has calculated, or can calculate, the total storage capacity of millions of home oil tanks and hundreds of millions of auto gasoline tanks, and the same for trucks and buses.  So a "guess" is made by assuming that those quantities "averaged out" do not fluctuate, and all the storage changes are in the surge tanks at pipeline and harbor points.  They do that because there is no logical alternative to the measurement.  But in reality, there is this vast floating amount that cannot be measured, nobody can possibly figure it out, and it has weeks and weeks of capacity. 

So when the pundits say there is a "glut," they are talking through their hat, and when they say there is some "dire shortage," again they are talking through their hat.  It is the invisible hand of the market that is keeping it all running.  There is always enough oil to meet the consumption.  The world is awash in oil, and the guys that pump that crude, well, they just keep on pumping! 

[Auson + 123]

17 minutes ago, Jan van Eck said:

"Inventory" is part of the manufacturing process.  If you are running a manufacturing plant, you need an inventory of various raw materials:  coiled steel sheet, rivets, welding rods, plastic pellets, and so forth.  As the finished goods leave the factory for the retailer, they first go (in larger shipments into a warehouse, which is inventory for the retail locations.  Then those stores in turn carry multiple finished goods for the consumer to go buy - more inventory.  Example:  think how frustrated you would be if you wanted to buy some underwear and went to the department store, and all there was was one pair.  The guy arriving three minutes ahead of you bought it, so now the sales clerk tells you that you have to wait until they phone the factory and another pair is made - just for you.   So you have inventory everywhere, in every sales channel.

In the oil business, every segment that is selling product is also carrying inventory.  The guys that pump are shipping it to some crude terminal, such as Cushing, Oklahoma, where a lot of inventory is stored, until the "factories," the big refineries, call it in.  Crude then sits at the refinery in raw-material tanks to ensure a steady supply for the cracking towers.  The various grades of material are then taken off and held in more tanks - more inventory - until it can be shipped out in some load, either a tanker or truck or railcar. It shows up at some fuel oil dealer and he takes it in again in yet another tank, then taken to your house (if you heat with oil or propane) or to the gasoline station to put in their tanks - more inventory.  And finally, since you store most of the oil product you buy, and use it only as needed in a draw-off, your car tank and house oil tank contain "inventory."   So you have a lot of inventory in the system, which allows you, the final user, to sip it off as you need it. 

Now, obviously, that huge inventory chain can be "mostly full" or "half full" or "mostly empty."  It will still function perfectly - even on "mostly empty," although you will pay this psychic price of angst and anxiety for having that heating-oil tank cruising on 1/8, and on your auto gas tank on the little flasher light that tells you that you only have another 40 miles to go before it all runs out. But it still runs just fine, in the meantime. 

What you are seeing in reaction to fluctuations in the inventory levels is human emotion, not some rational price response to working levels for the system to function.  Human emotions then in turn control what traders do in the commodities exchanges, where the primal forces of greed and fear dominate. It has nothing to do with reality. And there is where your price is set.

Although William Edwards' concept of "glut" is "one extra drop," that is a bit simplified.  "Glut" really means that all the inventory storage tanks in the system chain above are all getting totally filled, to the point that where say a tanker pulls in into the port of Rotterdam, there is no free storage in the land-side take-off and holding tanks to receive it, and the big tanker has to go "sit" for a few days until the tanks are drawn down and can again accept another shipment. In a true "glut" condition, all kinds of floating storage starts to get pressed into service.  Note that this is different from speculative floating storage, which is artificially done by trader speculators hoping for a better price in the future  (and if they guess wrong, it costs them a big bath).  Even the retail user gets into the speculation game a little bit; for example, in Germany it is common for homeowners to install these giant 1,000-gallon oil tanks that are made of high-density polyethylene plastic in giant blow-molding machines, so that they can buy their season's worth of heating oil in July or August when there is lots of distributor supply out there and the price is correspondingly lower. 

How big is the inventory chain in oil and refined products? The truth is, nobody really knows.  Nobody has calculated, or can calculate, the total storage capacity of millions of home oil tanks and hundreds of millions of auto gasoline tanks, and the same for trucks and buses.  So a "guess" is made by assuming that those quantities "averaged out" do not fluctuate, and all the storage changes are in the surge tanks at pipeline and harbor points.  They do that because there is no logical alternative to the measurement.  But in reality, there is this vast floating amount that cannot be measured, nobody can possibly figure it out, and it has weeks and weeks of capacity. 

So when the pundits say there is a "glut," they are talking through their hat, and when they say there is some "dire shortage," again they are talking through their hat.  It is the invisible hand of the market that is keeping it all running.  There is always enough oil to meet the consumption.  The world is awash in oil, and the guys that pump that crude, well, they just keep on pumping! 

Thanks William and Jan,

But wasn't it the 'glut' that caused Brent to drop from over $100 a barrel down to under $30 in 2014-15 ?

There were some numbers related to Supermassive tankers all being utilized on long term leases and moored at sea for speculative storage.

There were also satellite images of the Chinese storage tanks which were shown as full.

[Jan van Eck + 7,558]

1 minute ago, Auson said:

Thanks William and Jan,

But wasn't it the 'glut' that caused Brent to drop from over $100 a barrel down to under $30 in 2014-15 ?

There were some numbers related to Supermassive tankers all being utilized on long term leases and moored at sea for speculative storage.

There were also satellite images of the Chinese storage tanks which were shown as full.

Not quite.  The prices of crude are not set consequent to total inventory levels.  They are set as a functions of various traders attempting to gore the next trader fellow over at the next trading booth, in what is a "zero sum game;"  I make money on the trade, you lose money on the trade.  

As far as "supermassivetankers moored," you are referencing a VLCC.  Those things are expensive, and the owners do not rent them out for floating storage.  The reason is surprising: a tanker actually will deteriorate if it just sits at a mooring and is not being run.  If you want to use a VLCC for floating storage then you will pay more per diem than if it is actually running at sea.  The reasons are subtle.  I speculate that it relates to the buildup of humidity in the areas where heat otherwise would be present, specifically in the machinery rooms and the bilges underneath the machinery.  You  want those to be bone  dry to keep that steel from rusting.  It cannot stay dry unless the machinery is throwing off heat, absorbing the moisture (and venting it out the stack). 

Putting a tanker into storage (indeed, any cargo ship) is expensive. Ship owners will actually charter out a ship for a loss per diem, just to avoid the costs of layup and the damage to their ship from rust.

[Auson + 123]

5 minutes ago, Jan van Eck said:

Not quite.  The prices of crude are not set consequent to total inventory levels.  They are set as a functions of various traders attempting to gore the next trader fellow over at the next trading booth, in what is a "zero sum game;"  I make money on the trade, you lose money on the trade.  

As far as "supermassivetankers moored," you are referencing a VLCC.  Those things are expensive, and the owners do not rent them out for floating storage.  The reason is surprising: a tanker actually will deteriorate if it just sits at a mooring and is not being run.  If you want to use a VLCC for floating storage then you will pay more per diem than if it is actually running at sea.  The reasons are subtle.  I speculate that it relates to the buildup of humidity in the areas where heat otherwise would be present, specifically in the machinery rooms and the bilges underneath the machinery.  You  want those to be bone  dry to keep that steel from rusting.  It cannot stay dry unless the machinery is throwing off heat, absorbing the moisture (and venting it out the stack). 

Putting a tanker into storage (indeed, any cargo ship) is expensive. Ship owners will actually charter out a ship for a loss per diem, just to avoid the costs of layup and the damage to their ship from rust.

Jan,

Very interesting. So either those stories were made up by the traders ( highly possible ) or the tankers are started up and taken for a run once a week or so. 

There is also the possibility that the older tankers due for the scrappers were used ?

[JunoTen + 118]

These guys from OPEC are boring. They look so antiquated. The time when people were anxious about their meetings is long gone... If they pump the price up too much we'll drown them under electric cars even sooner than at this rate, and they know it.

[Jan van Eck + 7,558]

1 hour ago, Auson said:

Jan,

Very interesting. So either those stories were made up by the traders ( highly possible ) or the tankers are started up and taken for a run once a week or so. 

There is also the possibility that the older tankers due for the scrappers were used ?

Tankers used in floating storage are never started up and taken out for a run.  There are no crews on board. 

Old tankers designated for scrapping are typically used for floating storage by speculators. 

The industry does not use floating storage, the practice is to build tanks on land.  Part of the reason is liability insurance costs, or even availability.  If a tank leaks, it is controlled by a containment dike.  If some floating tanker leaks or sinks, it becomes a huge, gigantic cost. Nobody wants to write that insurance policy. 

[William Edwards + 708]

4 hours ago, Jan van Eck said:

"Inventory" is part of the manufacturing process.  If you are running a manufacturing plant, you need an inventory of various raw materials:  coiled steel sheet, rivets, welding rods, plastic pellets, and so forth.  As the finished goods leave the factory for the retailer, they first go (in larger shipments into a warehouse, which is inventory for the retail locations.  Then those stores in turn carry multiple finished goods for the consumer to go buy - more inventory.  Example:  think how frustrated you would be if you wanted to buy some underwear and went to the department store, and all there was was one pair.  The guy arriving three minutes ahead of you bought it, so now the sales clerk tells you that you have to wait until they phone the factory and another pair is made - just for you.   So you have inventory everywhere, in every sales channel.

In the oil business, every segment that is selling product is also carrying inventory.  The guys that pump are shipping it to some crude terminal, such as Cushing, Oklahoma, where a lot of inventory is stored, until the "factories," the big refineries, call it in.  Crude then sits at the refinery in raw-material tanks to ensure a steady supply for the cracking towers.  The various grades of material are then taken off and held in more tanks - more inventory - until it can be shipped out in some load, either a tanker or truck or railcar. It shows up at some fuel oil dealer and he takes it in again in yet another tank, then taken to your house (if you heat with oil or propane) or to the gasoline station to put in their tanks - more inventory.  And finally, since you store most of the oil product you buy, and use it only as needed in a draw-off, your car tank and house oil tank contain "inventory."   So you have a lot of inventory in the system, which allows you, the final user, to sip it off as you need it. 

Now, obviously, that huge inventory chain can be "mostly full" or "half full" or "mostly empty."  It will still function perfectly - even on "mostly empty," although you will pay this psychic price of angst and anxiety for having that heating-oil tank cruising on 1/8, and on your auto gas tank on the little flasher light that tells you that you only have another 40 miles to go before it all runs out. But it still runs just fine, in the meantime. 

What you are seeing in reaction to fluctuations in the inventory levels is human emotion, not some rational price response to working levels for the system to function.  Human emotions then in turn control what traders do in the commodities exchanges, where the primal forces of greed and fear dominate. It has nothing to do with reality. And there is where your price is set.

Although William Edwards' concept of "glut" is "one extra drop," that is a bit simplified.  "Glut" really means that all the inventory storage tanks in the system chain above are all getting totally filled, to the point that where say a tanker pulls in into the port of Rotterdam, there is no free storage in the land-side take-off and holding tanks to receive it, and the big tanker has to go "sit" for a few days until the tanks are drawn down and can again accept another shipment. In a true "glut" condition, all kinds of floating storage starts to get pressed into service.  Note that this is different from speculative floating storage, which is artificially done by trader speculators hoping for a better price in the future  (and if they guess wrong, it costs them a big bath).  Even the retail user gets into the speculation game a little bit; for example, in Germany it is common for homeowners to install these giant 1,000-gallon oil tanks that are made of high-density polyethylene plastic in giant blow-molding machines, so that they can buy their season's worth of heating oil in July or August when there is lots of distributor supply out there and the price is correspondingly lower. 

How big is the inventory chain in oil and refined products? The truth is, nobody really knows.  Nobody has calculated, or can calculate, the total storage capacity of millions of home oil tanks and hundreds of millions of auto gasoline tanks, and the same for trucks and buses.  So a "guess" is made by assuming that those quantities "averaged out" do not fluctuate, and all the storage changes are in the surge tanks at pipeline and harbor points.  They do that because there is no logical alternative to the measurement.  But in reality, there is this vast floating amount that cannot be measured, nobody can possibly figure it out, and it has weeks and weeks of capacity. 

So when the pundits say there is a "glut," they are talking through their hat, and when they say there is some "dire shortage," again they are talking through their hat.  It is the invisible hand of the market that is keeping it all running.  There is always enough oil to meet the consumption.  The world is awash in oil, and the guys that pump that crude, well, they just keep on pumping! 

You explained it so well, Jan. Thanks for going to the trouble to spell it out. My typing fingers are too lazy to undertake such. Thanks again!

Your closing statement, "There is always enough oil to meet the consumption.  The world is awash in oil, and the guys that pump that crude, well, they just keep on pumping! " says it all. But my guess is that there are no more than a half-dozen readers who will grasp the significance of that statement.

[Illurion + 894]

Well,  it is tuesday evening,  and both Brent and WTI are lower than they were yesterday,  but up slightly (50 cents) from Sunday.

Doesn't look like the cuts are having any major affect on the price per barrel so far.

[William Edwards + 708]

4 hours ago, Jan van Eck said:

Not quite.  The prices of crude are not set consequent to total inventory levels.  They are set as a functions of various traders attempting to gore the next trader fellow over at the next trading booth, in what is a "zero sum game;"  I make money on the trade, you lose money on the trade.  

As far as "supermassivetankers moored," you are referencing a VLCC.  Those things are expensive, and the owners do not rent them out for floating storage.  The reason is surprising: a tanker actually will deteriorate if it just sits at a mooring and is not being run.  If you want to use a VLCC for floating storage then you will pay more per diem than if it is actually running at sea.  The reasons are subtle.  I speculate that it relates to the buildup of humidity in the areas where heat otherwise would be present, specifically in the machinery rooms and the bilges underneath the machinery.  You  want those to be bone  dry to keep that steel from rusting.  It cannot stay dry unless the machinery is throwing off heat, absorbing the moisture (and venting it out the stack). 

Putting a tanker into storage (indeed, any cargo ship) is expensive. Ship owners will actually charter out a ship for a loss per diem, just to avoid the costs of layup and the damage to their ship from rust.

 

4 hours ago, Auson said:

Thanks William and Jan,

But wasn't it the 'glut' that caused Brent to drop from over $100 a barrel down to under $30 in 2014-15 ?

There were some numbers related to Supermassive tankers all being utilized on long term leases and moored at sea for speculative storage.

There were also satellite images of the Chinese storage tanks which were shown as full.

You ask, "But wasn't it the 'glut' that caused Brent to drop from over $100 a barrel down to under $30 in 2014-15 ?". No. It was not. If you take the trouble to go back and look at inventory numbers, you will see that the beginning of the price fall began while inventories were modest. The increase in inventories began in 2015 and continued through 2016, AFTER the price had fallen (in 2014), not before. Check it out. The price drop occurred because the speculators quit buying and soon began liquidating long positions. Once the fall started the accumulated long contracts had to be sold -- at any price.

A similar situation occurred this past month. Does it have further to go? Most likely.

[JunoTen + 118]

You really think it will go lower William ? 2015 all over again ?

[William Edwards + 708]

4 minutes ago, JunoTen said:

You really think it will go lower William ? 2015 all over again ?

I won't suggest timing, but direction and magnitude are pretty sure, in my humble opinion, for a repeat of 2014/15.

[Tom Kirkman + 8,860]

$20 to $40 oil should scare the bejeezus out of you.  Absurdly, excessively low oil prices can cause global havoc in much the same way that absurdly, excessively high oil prices can.

My own favored economic balance between oil producers and oil consumers for this year was $65 [Brent].  My ad nauseum comments about this are easy enough to find on this forum.  And my hope for $65 oil this year seems to be pretty close.

My own favored *hope* for 2019 is $70 [Brent] and $65 [WTI].

In my opinion, that should be a relative balance, neither too high nor too low.

If recall correctly, William suspects that oil should be heading back down to more historical levels of around $40.  (Please note I'm not trying to speak on behalf of William.)

I tend to view $40 oil as unsustainable, as oil companies will not be able to re-invest profits back into new exploration activities.  But I can't control the zero sum game of oil traders.

[William Edwards + 708]

1 minute ago, Tom Kirkman said:

$20 to $40 oil should scare the bejeezus out of you.  Absurdly, excessively low oil prices can cause global havoc in much the same way that absurdly, excessively high oil prices can.

My own favored economic balance between oil producers and oil consumers for this year was $65 [Brent].  My ad nauseum comments about this are easy enough to find on this forum.  And my hope for $65 oil this year seems to be pretty close.

My own favored *hope* for 2019 is $70 [Brent] and $65 [WTI].

In my opinion, that should be a relative balance, neither too high nor too low.

If recall correctly, William suspects that oil should be heading back down to more historical levels of around $40.  (Please note I'm not trying to speak on behalf of William.)

I tend to view $40 oil as unsustainable, as oil companies will not be able to re-invest profits back into new exploration activities.  But I can't control the zero sum game of oil traders.

Regarding whether $40 is a sustainable pi[rice, Tom, may I suggest that you look at the data that give me encouragement that that level will work. That data display is the constant-dollar oil price history that BP publishes each year. Just do the average for the past 160 years.

To further support my assessment, please keep in mind that, for at least 75 years, additional production capacity in the Middle East has remained off the shelf, even with a producing cost of $5/B, while other more expensive production helped fill the demand. Now imagine a world where demand fails to satisfy the wishes of all the successful oil-finding activity, electric cars come in and the Middle East begins losing market share and incurring huge spare capacity numbers. $40 in today's dollars will seem to be merely a wonderful dream.