Coronovairus, Phase One Agreement, Lower for Longer

[Osama + 248]

Hello Everyone! Yes... It has been a while. I hope you still remember me. 

I wrote this recently and would love to have a discussion - like old times! 

 

"While the reaction to Coronavirus might be subject to sensationalism and this precipitous fall in prices may be temporary; the overall sentiment vis a vis oil prices has shifted towards very bearish territory. Even if everything returns back to normal it will take few months for the markets to recuperate.

With oil demand being hit hard; the likelihood of China fulfilling its commitment to the Phase One trade deal with the U.S. is very low. With that in mind, it seems likely that bears will rule oil markets for the rest of 2020."

Link: https://www.google.com/amp/s/oilprice.com/Energy/Oil-Prices/Bearish-Sentiment-Will-Dominate-Oil-Markets-Through-2020.amp.html

Osama

[Douglas Buckland + 6,308]

Possibly, but I would bet that Chinese demand for oil will increase rapidly once the virus issue is in hand.

For the past 5 years or so I can not see where the price of oil has been handcuffed to simple supply vs demand economics. Storage/over supply cannot be verified, supply has been hit by the OPEC+ cuts, the Venezuelan and Libyan ‘cuts’ and a faltering US shale oil industry...and the oil price shrugged it off. Exploration for new oil is almost non-existent and even if new fields are found it will take years to get it to market.

I personally do not think ANYONE has a decent grip on either oil prices or the future of the oil industry.

[frankfurter + 562]

hmm, perhaps not entirely correct. China will remain committed to agreements, but the targeted volumes may not be reached due to force majeur. 

[footeab@yahoo.com + 2,190]

I laughed at the agreement when it was reported.  There is literally no possible way for China to fulfill the agreement. 

So.... It doesn't matter.  It was a ploy for time.  Nothing more.

[Osama + 248]

6 hours ago, Douglas Buckland said:

Possibly, but I would bet that Chinese demand for oil will increase rapidly once the virus issue is in hand.

For the past 5 years or so I can not see where the price of oil has been handcuffed to simple supply vs demand economics. Storage/over supply cannot be verified, supply has been hit by the OPEC+ cuts, the Venezuelan and Libyan ‘cuts’ and a faltering US shale oil industry...and the oil price shrugged it off. Exploration for new oil is almost non-existent and even if new fields are found it will take years to get it to market.

I personally do not think ANYONE has a decent grip on either oil prices or the future of the oil industry.

Agree with your last sentence... We can only surmise! Take an educated guess... We can't be certain... But that should not stop us from "guesstimating". 

[Osama + 248]

2 hours ago, frankfurter said:

hmm, perhaps not entirely correct. China will remain committed to agreements, but the targeted volumes may not be reached due to force majeur. 

But then the same reason would render the agreement void.... Gradually 

[Douglas Buckland + 6,308]

2 hours ago, frankfurter said:

hmm, perhaps not entirely correct. China will remain committed to agreements, but the targeted volumes may not be reached due to force majeur. 

So you don’t think they’ll ramp back up to pre-virus level, or even further to make up lost ground?

[Osama + 248]

2 hours ago, footeab@yahoo.com said:

I laughed at the agreement when it was reported.  There is literally no possible way for China to fulfill the agreement. 

So.... It doesn't matter.  It was a ploy for time.  Nothing more.

Yes it is! The promises are unrealistic! 

[frankfurter + 562]

1 hour ago, Douglas Buckland said:

So you don’t think they’ll ramp back up to pre-virus level, or even further to make up lost ground?

if you mean resume to agreed levels, yes I believe that would be the case.  but to exceed, to make up for lost volumes, would depend upon the logistics, I should think.  

[Douglas Buckland + 6,308]

Fair enough, but I can’t see China resting on their laurels once this virus issue is put to bed, it SHOULD be ‘full steam ahead’ at that point as they try to fill orders left in limbo and meet contract/quota demands.

One thing is certain, they will be out to refill the coffers ASAp.

[footeab@yahoo.com + 2,190]

It is humorous that 100% of every report has exactly 2.1% deaths to infected rate...

Coronoavirus seems to be the perfect organism at math and statistics....

[Douglas Buckland + 6,308]

13 minutes ago, footeab@yahoo.com said:

It is humorous that 100% of every report has exactly 2.1% deaths to infected rate...

Coronoavirus seems to be the perfect organism at math and statistics....

Unlike myself....damn virus!

[frankfurter + 562]

22 minutes ago, footeab@yahoo.com said:

It is humorous that 100% of every report has exactly 2.1% deaths to infected rate...

Coronoavirus seems to be the perfect organism at math and statistics....

then you are reading the wrong reports and drawing the wrong conclusions. 

[GunnysGhost + 157]

8 minutes ago, frankfurter said:

then you are reading the wrong reports and drawing the wrong conclusions. 

He's implying that someone is lying, and he did it tongue-in-cheek by posting it as an interesting factoid.   

[frankfurter + 562]

3 hours ago, Osama said:

But then the same reason would render the agreement void.... Gradually 

Well, I do not know what may be your experience in the industry.  But in my experience with the contracts, I have never seen an agreement voided over disruptions caused by such factors as the virus.  Reduced volumes temporarily, yes: void, no.  The only time I have seen void is when the producer's facility blew up, literally, and the producer could not say when he could resume. But even then, when rebuilt, a new contract was consummated that was 99.9% the same as the voided one. [don't ask for disclosure, as I have signed confidentiality].  Respectfully, I cannot see why you are concerned about voided contracts.

 

[Douglas Buckland + 6,308]

Are you saying that failure to meet the terms of a contract cannot make the contract null and void?

I seriously doubt that anyone would cancel a contract with the Chinese due to lack of performance caused by the virus, but unless I am mistaken, failing to meet the terms of a contract is grounds for terminating a contract. If this were not the case, why have a contract?

[Osama + 248]

43 minutes ago, frankfurter said:

Well, I do not know what may be your experience in the industry.  But in my experience with the contracts, I have never seen an agreement voided over disruptions caused by such factors as the virus.  Reduced volumes temporarily, yes: void, no.  The only time I have seen void is when the producer's facility blew up, literally, and the producer could not say when he could resume. But even then, when rebuilt, a new contract was consummated that was 99.9% the same as the voided one. [don't ask for disclosure, as I have signed confidentiality].  Respectfully, I cannot see why you are concerned about voided contracts.

 

See, I might not be as experienced as you. But what I am saying is that as the virus is indirectly going to effect one of the key point of the Phase One deal... We might see trade tensions resurfacing.. And therefore a downward pressure on oil prices. 

[Osama + 248]

26 minutes ago, Douglas Buckland said:

Are you saying that failure to meet the terms of a contract cannot make the contract null and void?

I seriously doubt that anyone would cancel a contract with the Chinese due to lack of performance caused by the virus, but unless I am mistaken, failing to meet the terms of a contract is grounds for terminating a contract. If this were not the case, why have a contract?

Yes! Exactly! My point Mr. Buckland! 

[wrs + 893]

From what I have read, it's not really economic to send oil to China because Panamax isn't a good size vessel to amortize the cost of sending the oil so far.  It's more cost effective and profitable to ship the US LTO to Europe and it matches their refining capabilities better.  Now with LNG cargoes that may be different, however, the LNG market is currently oversupplied.

Edited February 14, 2020 by wrs

[0R0 + 6,251]

8 hours ago, Douglas Buckland said:

Are you saying that failure to meet the terms of a contract cannot make the contract null and void?

I seriously doubt that anyone would cancel a contract with the Chinese due to lack of performance caused by the virus, but unless I am mistaken, failing to meet the terms of a contract is grounds for terminating a contract. If this were not the case, why have a contract?

The conditions that led to the contract may still hold looking forward after the breech - which is why the old contracts resume or are replaced with updated ones. 

[0R0 + 6,251]

7 hours ago, wrs said:

From what I have read, it's not really economic to send oil to China because Panamax isn't a good size vessel to amortize the cost of sending the oil so far.  It's more cost effective and profitable to ship the US LTO to Europe and it matches their refining capabilities better.  Now with LNG cargoes that may be different, however, the LNG market is currently oversupplied.

VLCCs are the carriers for round the cape transport to China. Not Panamax, those are largely US West Coast transport. They carry far more oil than fits on a Panamax.

[Douglas Buckland + 6,308]

1 hour ago, 0R0 said:

The conditions that led to the contract may still hold looking forward after the breech - which is why the old contracts resume or are replaced with updated ones. 

After the breech of contract, wouldn’t the ‘damaged’ party have the option to cancel the contract?

Granted, depends on the terms of the specific contract, but generally speaking...

[Tom Kirkman + 8,860]

5 minutes ago, Douglas Buckland said:

After the breech of contract, wouldn’t the ‘damaged’ party have the option to cancel the contract?

Granted, depends on the terms of the specific contract, but generally speaking...

Generally, yes.  I have reviewed many assorted contracts over the years, and the first things I tend to check for are any clauses for Liquidated Damages for delays, and the various ways that the contract can be voided for non-performance.  A clause for Binding Third Party abitration for resolving irreconcilable disputes is common. 

No, I'm not a lawyer, but I have a fair chunk of real life experience in reading oil & gas contracts and flagging dangerous clauses before they get signed by people who don't actually read the contracts.

Since I have invariably been on the "delivery" side of O&G, my rule of thumb is avoid any Liquidated Damages clauses if possible.  And if LD clause is unavoidable, ensure it is capped at a maximum of 10% of the total value of the undelivered part of the contract 

At a local company one of the sales guys signed a Purchase Order that had a Liquidated Damages clause of 10% LD charge *per week* of the *total value of the contract*.  With no cap on the LD charges. Over 100 line items to be delivered. 

So if 99 out of 100 line items are delivered on time, but 1 line item is 10 weeks late, then zero money would be paid for the entire contract.

Stupid stuff like that can bankrupt a company.

At a different company, I got a good education in contract evaluation and contract risk management from the regional legal team at Honeywell a number of years ago.  Took me a year to hash out a renewal to a 4 year maintenance contract with a National Oil Company.  They play hardball on terms & conditions.

[Boat + 1,323]

11 hours ago, Douglas Buckland said:

Are you saying that failure to meet the terms of a contract cannot make the contract null and void?

I seriously doubt that anyone would cancel a contract with the Chinese due to lack of performance caused by the virus, but unless I am mistaken, failing to meet the terms of a contract is grounds for terminating a contract. If this were not the case, why have a contract?

You don’t terminate the contract but access fees, penalties and any other damages caused by not filling the contract. These should be spelled out clearly like Tom indicated. You don’t get-er-done we’ll slap a much higher tariffs on your stuff. Or you were accessed a quota worth 366 billion, Shut your factories down. 

[Douglas Buckland + 6,308]

I never insinuated that they should ‘shut their factories down’. They probably have other clients that they may have been able to service.

So let me get this straight...I sign a contract, I assume it is binding, to have Company X manufacture and deliver 100 widgets within a certain timeframe. Company X only delivers 75 widgets during this timeframe.

Company X is now in breech of contract.

Depending on the terms of the contract, as Tom pointed out, I SHOULD have the options of:

A. Terminating the contract in full without accepting the 75 widgets.

B. Accepting the 75 widgets as per contracted terms, then terminating the contract.

C. Accept the 75 widgets as per terms of the contract then renew or renegotiate the contract.

As I indicated previously, why even negotiate a contract if it is non-binding on either party?