Guest “oil’s well that ends well” by David Middleton
The ChiCom-19 hostage crisis certainly makes strange bedfellows. Over the past few weeks I have been agreeing with Dallas County Commissioner John Wiley Price on the need to end the hostage crisis now. In the 35 years, Mr. Price has served as a county commissioner, I don’t think I’ve ever agreed with him before. Matt Egan, lead writer for CNN Business, actually wrote an article about the oil industry that made sense. His work is usually so awful, that it doesn’t even have ridicule value… But, like a “blind squirrel occasionally getting the nut”…
How negative oil prices could set the stage for the next price boom
By Matt Egan, CNN Business
Updated 10:41 AM ET, Thu April 23, 2020
New York (CNN Business)The boom-to-bust oil market is experiencing one of its darkest moments in history.Oil demand is collapsing because of the coronavirus crisis. Supply is shrinking — but not nearly fast enough.
The world is literally running out of room to store unneeded barrels of oil piling up during the coronavirus pandemic.
That storage problem is so dire that it caused oil prices to turn negative this week for the first time ever.
The crash is forcing a reckoning in the oil industry — a painful one. Many shale oil producers have canceled drilling plans. Others have been forced to shut down active wells. Some frackers won’t survive at all.
But the violent rebalancing in the oil market might be so overdone that it will set the stage for a spike in prices. When and if demand recovers, there might not be enough supply to meet it.
[…]
“We are in an epic bust. As hard as it may be to believe, the next step is a boom,” said Pavel Molchanov, energy analyst at Raymond James.
[…]
“When demand returns to something close to normal levels, it’s quite possible there will be a shortage situation in 2021,” Molchanov said.
[…]
“With ultimately a finite amount of storage left to fill, production will soon need to fall sizably to bring the market into balance,” Goldman’s Courvalin wrote, “finally setting the stage for higher prices once demand gradually recovers.”
[…]
“This inflection will play out in a matter of weeks, not months, with the market likely forced into balance before June,” Courvalin wrote.
Companies are cutting production in two ways. First, they are slashing their spending plans for drilling new and uncompleted wells. For instance, ExxonMobil (XOM) cut its 2020 spending by 30%, including a large focus on the Permian Basin shale oilfield in West Texas.
Secondly, and most importantly, oil companies are turning the taps off on active wells through a painful process known as “shut-ins.” And there is no guarantee those taps can or will get turned back on at full capacity.
“It will take time and money to turn it back on. It’s not like a light switch,” David Trainer, CEO of New Constructs, an investment research firm based in Nashville.
[…]
“When demand comes back online, there won’t be as many people there to make the oil,” said Trainer.
[…]
CNN Business
While we don’t technically “make the oil,” if and when demand recovers, the longer the downturn, the longer it will take to bring production back up. When supply growth lags behind demand growth, prices quickly rise.
Unless the Fire Marshal Gumps of the world intend on perpetuating the ChiCom-19 forever, oil demand will recover and the supply might not be readily available. The Peak Oilers, who haven’t read Hubbert and don’t even know what “peak oil” is, will likely start babbling about falling off a Seneca Cliff into Olduvai Gorge. They’ll be just as wrong as they were the last time demand exceeded supply and prices skyorocketed. So, the world faces two possible paths
And… there’s another silver lining to this very dark cloud:
The possibility that this may lead to increased emissions
Historically, low oil prices have created headaches for climate advocates. Cheap oil means cheaper gas at the pump, leading people to drive more and spend more on emissions-intensive consumer goods.
Today, with much of the world locked down, consumers aren’t consuming all that much or making big choices that drive up emissions, but businesses are still making those decisions, and low oil prices reduce the incentive to change. A delivery company purchasing a new van fleet would be less inclined to go electric, for example. A consumer food company considering switching its packaging away from oil-based plastic product may wait it out a few more years. “Oil is cheap. It’s very hard to transition away from oil when it’s very cheap,” says Lorne Stockman, senior research analyst at Oil Change International, which advocates for a transition away from fossil fuels. “And it’s particularly difficult when we don’t have a coherent policy on climate change.”
A key concern for many climate advocates is the possibility that natural gas—which in the U.S. is often produced alongside oil and remains cheap for many of the same reasons that oil does—will further solidify its position in the mix of electricity sources. Low natural gas prices may entice utilities and policymakers to continue to rely on the fossil fuel rather than looking to renewable alternatives, and, because of the long lifespan of natural gas infrastructure, that would lock in decades of emissions.
Time Magazine
So it basically boils down to: The Fire Marshal Gumps of the world need a permanent ChiCom-19 hostage crisis in order to prevent the weather from changing… Sort of like if Stanley Kubrick directed a movie based on a George Orwell novel.
Day Forty-something of America Held Hostage by ChiCom-19
Local news, as of noon Friday…
| 4/25/2020 | |||
| Dallas County | CHICOM-19 | ||
| Population | Cases | Deaths | |
| 2,637,772 | 2,834 | 77 | 2.7% |
| % of population with | 0.11% | 0.00% | |
| % with, rounded | 0.1% | 0.00% | |
| % without | 99.89% | 100.00% | |
| % without, rounded | 99.9% | 100.0% | |
| Menodoza Line (.200) | 2/27/2035 | 0.200 |
ChiCom-19?
In my never ending effort to eliminate political correctness, I refer to all things coronavirus as ChiCom-19.
Fire Marshal Gump?
County Judge Clay Jenkins is the chief executive of Dallas County and presides over the County Commissioners Court. He looks like the Jim Carrey character, Fire Marshal Bill from In Living Color and he talks like Forrest Gump. Gump appears to be hell-bent on perpetuating the ChiCom-19 hostage crisis forever.
My thoughts turn NOT to the domestic frackers and producers, who I know are getting decimated by this. Many of those will enter bankruptcy, either re-org and shed debt and emerge leaner. Or they’ll go into liquidation bankruptcy where their assets and leases will be scooped at fire-sale prices by investors with deep pockets of cash to sit on it for a few years hoping for 10x fold return on investment as demand returns. Midland-Odessa has a long history of boom-bust cycles. But I don’t remember any Wars out in West Texas over it.
My thoughts turn to what this must be doing to Russia’s foreign currency reserves being rapidly drained. Such an extended low oil price could implode Russia and Putin’s control there into chaos.
Market forces, supply and demand, call it what you like, it’s a story as old as time.
Right on, David! As an Exploration Geologist in the natural resources sector of the economy, I have often wondered why we (intelligent humans) can’t figure out how to stop the wild swings between boom and bust. Lucky for me I can claim to be an expert on either gold or copper, so economy booming its copper, things tighten up and we turn to gold for security, I’m your huckleberry! With oil it’s the same, just the monetary stakes are higher. Now comes the unintended consequences, some of which you mentioned. The big one may be reduction of CO2 production without a concomitant reduction in temperature, wait for it. Day 36 of the quarantine, dogs talking revolt, but I´m not with them yet. Stay sane and safe.
Makes one wonder if those that have locked everything down shorted the market.
“Historically, low oil prices have created headaches for climate advocates. Cheap oil means cheaper gas at the pump”
Well yes and no. HIstorically, there were no CARBON TAX ADVOCATES and no carbon tax.
Now.. the ‘progressive’ governments will see their chance to pile large carbon taxes onto cheap dollars per gallon fuel and we will be used to those prices so we wont object. When the price of oil recovers, and pump prices rise, they can howl that ‘renewables’ are cheaper and paying for themselves.
That’s my expectation anyhow.
This is tangentially related to the topic of this thread, but I now must report how an economist at the school where I work (for the next three weeks at least) has calculated a $5.2 trillion benefit to the lock-down. In effect her group has run models with and without certain responses (social distancing) and, taking the number of lives saved, multiplies each by $10,000,000 and it’s money in the bank!
This analysis is wrong and naive on many levels and in many ways, but I am afraid it is a harbinger of the sort of post crisis analyses we are likely to see often, and how they will lead to having learned nothing — the Fire Marshall Gumps of the world will make good use of these. By the way I now see that the WHO is maintaining that there is no evidence having been infected with the COVID-19 virus will confer any immunity, and so letting the virus run its course is not a viable plan to reopen society. Apparently lock-down is all we got…, but the good news is we will all be rich!
still thinking that there is a free market, how quaint.
4/25/2020 Dallas County death toll: 77
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4/17/2020 it was 55, a 40% increase in eight days. https://wattsupwiththat.com/2020/04/17/futurist-oil-industry-doomed-by-chicom-19-because-climate-change/#comment-2969499
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How many will be dead by the end of April?
Suppose we mitigated enough so virus deaths got to same level as deaths caused by flu. Is that enough ? I have yet to have anyone answer the question as to what is the realistic acceptable number of deaths ? There is no honest discussion.
As pointed out before, South Korea provides a good Wuhan virus fact baseline. Thanks to aggressive contact tracing and PCR testing, it is almost certain that there are only a few undetected cases. As of yesterday, about 590,000 tested, 10708 positive, 240 fatalities. That might be skewed a little low because the early cases were younger adults in the religious sect. So infection attack rate is about 10708/590000 = 1.8% WITH mitigation (quarantine positives) and the CFR is about 240/10708 = 2.2% in a modern healthcare system that is not overwhelmed.
The US has about 328 million people (not including illegals). So with full mitigation (we don’t yet have contact tracing), we would expect about 5.9 million cases and 130,000 deaths. We are nowhere near those Korea based numbers, in part because the country is big and the infection rate small in flyover country. So the sharp economic pain has some dividends in places like NYC, Detroit, and Chicago.
The question is now about reopening, as the President has recognized. Looks like May is a biggie, because at least 14 states are starting To reopen or will next week. And we will have the apparently promising results from the properly designed U. Minn/McGill study by end May that will say whether we have a preventative and an effective therapy ‘off the shelf cheap’.
The recovery may be considerably slower than anticipated, if some of our socialist state Governors can keep their boots on the economic throats of their citizens. In the Peoples Republic of Virginia, (D) Governor Northam said “We cannot and will not lift restrictions the way you turn on a light switch”. Virginia State Health Commissioner Norman Oliver claimed the first phase could span two years. Phase One involves the reopening of certain businesses deemed “nonessential,” requiring them to comply with stringent safety guidelines. Oliver said he expected it to be in effect until “medical countermeasures” like a treatment or vaccine are rolled out broadly. “I, personally, think Phase One will be a two year affair”. This is the face of ‘command and control’ fascist socialism. “We know what’s good for you, because….science!”
Non-essential businesses??? Jobs Are Essential! Paychecks Are Essential! Freedom Is Essential!
The hostage crack is misdirected. It was not Russians, Chinese, Iranians, or anyone else who put Americans in home detention. And it wasn’t the virus. That was all caused by the government.
The same is true of the energy market volatility. The Fed kept adding liquidity which made its way to shale producers who were using more energy to develop a well than the energy content of the product that would be produced. The shale sector was destroying capital and burning through cash for an entire decade even when prices were higher. There was never any chance of energy independence or of any profit outside of a few small core areas where fracking did make a lot of sense.
Central Washington gasoline is mostly $2-ish.
I’ve been watching for the place that will pay me, but I’m still looking.
– – – – –
flatten the curve
Most places have taken the “flatten” route, although a few want to wait out the completed demise of the virus within their boundary. (See AU & NZ – – An interesting future, worth watching.)
However, where the curve has been flattened, and where there are not enough deaths (Zero, where we live) to plot a curve, mayors and governors (See Jay Inslee) continue with Panic 2020.
Questions:
Of all the hospitals in North America, how many are swamped with virus cases? How many are under utilized and going bankrupt? What did useless extra actions cost? Example: Soldiers from the 627th Hospital Center out of Fort Carson, Colorado, established a 250-bed hospital inside the Century Link Field Event Center in Seattle? Without serving a patient, the group was sent home. Army Times
I have to use a drive-up window at various fast-food places, I guess because going inside is ..something?.. !
I can go into a grocery store and walk to a deli, order, purchase, and carry out the meal, I guess because this is ..something else?.. !
Panic 2020 is very confusing.
Only it isn’t called ChiCom-19
I imagine some around here would like to hear about the Ethanol plants here in Nebraska shutting down as well. Some have converted to making hand sanitizers. We aren’t in the total lockdown that most of the country is in however, the social distancing thing is happening and unemployment numbers are nowhere near the rest of the country. There are some other states here in flyover country that are doing the same. I’m curious to find out what the differences in the Kung Flu stats between states that lockdown and those that don’t. Here 1/ 38000.
I would want to purposely get disease since I’m healthy and don’t want to pass it on to my parents or wife’s parrots. Both sets in 70s. Then I can quarantine and will feel reasonable sure I won’t spread it to them.
My fear is unknowingly getting asymptotic infection and then unknowingly spreading it to them.
Aren’t natural gas prices going to be going through the roof soon? As I recall, nearly 70% of our natual gas comes from fracking, and with fracking all but shut down and no coal plants… natural gas for electricity generation is about to go through the roof. We NEED to get rid of the CO2 endangerment finding and bring coal back on line.
David
Can you please explain the following?
https://aip.com.au/sites/default/files/download-files/2020-04/Weekly%20Petrol%20Prices%20Report%20-%2019%20April%202020.pdf
The above report shows unleaded prices in Australia. It appears from figure 5 and 6 that the difference between wholesale and retail is growing both in $/litre and %. Are we being ripped off?
And also is this happening in Texas?
Thanks
Waza, as the volume drops, the gross profit drops on sales. Since the seller must live on net profits (and they can’t drop if he is to remain solvent and alive) he must increase his margin to pay the rent. You’re benefitting, but you have to share with the guy just upstream or it doesn’t work. You’re not being ripped off.
No doubt, in many forms, it’s happening everywhere.
Hi David
Thank you for another interesting post.
Post suggestion (starting with a bit of ironic humor)
Splash: PEAK OIL FINALLY REACHED!
Start with some graphs (follow me here…) and discussion. Punchline: Peak Oil Storage Reached….The post then goes into an informative discussion of how exactly oil is stored, by whom, for how long etc (tanks, ships, caverns, etc, etc). Tidbit: How much oil products can individuals store? (For example I have filled up 4 vehicles, 3 boats, and about 50 gallons of containers). How about all the gas stations, backup generators, etc. Curious minds (like me) have no idea..
The discussion then morphs into how various oil/gas production facilities actually shutdown/cut production…I assume some are pretty simple, some are very complicated, some are “one way”? (ie shutdown severely impairs future well production?). How long to shutdown, vs how long to start back up?. What happens to a well that is owned or leased by a company that goes bust?
Finally, how does this “negative” oil price actually work? If I own a large airline, is there any way I can lock in any of this “free” oil? Is the futures market saturated with the equivalent of $20/barrel product? How much future production can actually be hedged this way? The questions go on…
I (and I assume many at WUWT) have lots of questions, and very little practical knowledge of how all this really works. The MSM is, of course, much worse than worthless in this regard.
Like Rud Istvan, you are uniquely positioned to do a lot of worthwhile educating here….
Thanks in advance!
Regard,
Ethan Brand