Collapse of crude oil prices

[exstasie]

Let's talk about the oil industry.

Crude oil prices are currently crashing to new lows, down 79% for the year and counting. The corona virus pandemic has completely destroyed global demand.



Why does this matter? The oil industry is heavily leveraged, lots of corporate debt. The oil crash threatens to push highly leveraged firms into bankruptcy:

Unfortunately, the positive and negative effects are not symmetric, and they do not cancel out. Those who get hurt by the price decline are likely to file for bankruptcies, and that may create a chain of cascading events: adverse events get amplified. If there is a wave of corporate default and bankruptcies, it will reverberate through the entire economy through inter-linkages in the financial sector and supply-chain.

That's where an economic crisis for oil companies snowballs into a financial crisis for banks. This may be the first domino to fall in that respect. A massive Singapore oil trading firm just went bankrupt, leaving its creditors (banks) with a $3.34 billion shortfall!

The downfall of Hin Leong Trading (Pte) Ltd., one of the biggest and most secretive forces in the world of physical fuel-oil trading, shows the depth of the fallout from the dramatic drop in oil prices so far this year as a consequence of the Saudi-Russia price war and the coronavirus pandemic.

Lim Chee Meng, the only son of Lim Oon Kuin, said the company also sold some of the million of barrels of refined products it had used as collateral to secure loans from its banks, according to the people, citing an April 17 email sent by the shipping affiliate of Hin Leong, notifying recipient parties of proposed moratorium proceedings.

As a result, the company faces a significant shortfall between the oil stocks it held and the inventories pledged to its banks. That potentially means huge losses for the banks which provided the merchant with billions in loans as the collateral they thought they have as a guarantee isn’t there.

Hin Leong told its creditors this month that total liabilities reached $4.05 billion as of early April, while assets were just $714 million, leaving a hole of at least $3.34 billion, according to screenshots of the presentation to a group of bankers seen by Bloomberg News.

The balance sheet of the company showed no equity at all as of April 9, 2020, and warned that “figures obtained from the company are subject to verification”.

The latest accounts of Hin Leong Trading, for the financial year ending October 31, 2019, were audited by Deloitte & Touche LLP. The auditor didn’t flag any problems, according to people familiar with the matter.

Deloitte audited their books through October last year and found no problems. Now, $3.34 billion gone. Who is going to eat those losses? Hin Leong and Ocean Tankers' creditors and banking partners. Could this be the first domino in a larger eventual banking crisis?

Last week, before we know the extent of the company's financial debacle - and fraud - we concludes that "it is unclear what will happen to the Singapore commodity trading giant if it is unable to find banks that will backstop its operations." Well, we now know - game over - which makes the second part of our forecast especially applicable: "should the firm become insolvent, the downstream cascade for companies in the Pacific Rim could be devastating."

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[stompix]

Let's talk about the oil industry.

That's where an economic crisis for oil companies snowballs into a financial crisis for banks. This may be the first domino to fall in that respect. A massive Singapore oil trading firm just went bankrupt, leaving its creditors (banks) with a $3.34 billion shortfall!

You left out the most important paragraph in the Bloomberg article:

Omitted Losses
The son, also known as Evan Lim, said he was unaware of the reason for losses suffered over some years and his father had instructed Hin Leong’s finance department to omit them from its financial statements, according to his affidavit.
In his own affidavit seen by Bloomberg, the father also said he ordered that the losses be omitted and that the company hasn’t been making profits in the last few years, contrary to its financial statements.

So, this crisis was just the last drop in a 1000 gallon barrel.

I really thought that the situation in the oil industry was pretty bad, but now seeing that ZH is again going full throttle about another disaster I'm thinking nothing will happen. Contrarian betting against ZH's agenda is probably the only more profitable thing than BTC, I doubt even buying BTC at 1 cent would match that.

[so98nn]

So, this crisis was just the last drop in a 1000 gallon barrel.

I really thought that the situation in the oil industry was pretty bad, but now seeing that ZH is again going full throttle about another disaster I'm thinking nothing will happen. Contrarian betting against ZH's agenda is probably the only thing more profitable thing, I doubt even buying BTC at 1 cent would match that.

But how come it doesnt matter to oil industry in the long run? Surely the industry way to big and it can easily overcome the losses they are recurring right now. But lets just consider the current scenario heading up for over few months since pandemic is severe and we have no antidote for it.

Considering use of crude oil in making the fuel, there is no rocket launch, no airplane taking off, no cars/trucks/bikes running for next few months and thus kings barrels are just waste with zero demand. This can rupture the shares for oil industry pretty badly I guess.

[exstasie]

Let's talk about the oil industry.

That's where an economic crisis for oil companies snowballs into a financial crisis for banks. This may be the first domino to fall in that respect. A massive Singapore oil trading firm just went bankrupt, leaving its creditors (banks) with a $3.34 billion shortfall!

You left out the most important paragraph in the Bloomberg article:

Omitted Losses
The son, also known as Evan Lim, said he was unaware of the reason for losses suffered over some years and his father had instructed Hin Leong’s finance department to omit them from its financial statements, according to his affidavit.
In his own affidavit seen by Bloomberg, the father also said he ordered that the losses be omitted and that the company hasn’t been making profits in the last few years, contrary to its financial statements.

So, this crisis was just the last drop in a 1000 gallon barrel.

I guess that's one way to describe a $3.34 billion shortfall.

A Big Four auditor also signed off on their books 6 months ago, which just goes to show how easy it is to hide major frauds even at audited public companies. Crashes and liquidity crises often bring major insolvencies like this to a head. That's what happened here. At $60/barrel they were able to keep the fraud going, but not at these prices.

And how is that the most important takeaway? Whether there is fraud underlying a bankruptcy doesn't make any difference. The issue is the systemic risk the oil industry poses to banks.

I'm more thinking about highly leveraged producers and field service companies and the banks who back them than physical oil traders anyway. This just happened to be relevant because the news broke yesterday. I'm sure there is also some level of Enron-style fraud going on in the oil industry too, which only exacerbates the risks.

I really thought that the situation in the oil industry was pretty bad, but now seeing that ZH is again going full throttle about another disaster I'm thinking nothing will happen.

Even a broken clock is right twice a day. You don't have to pay attention to ZH. Lots of respectable and mainstream analysts have been talking about this. https://www.nytimes.com/2020/03/20/business/energy-environment/coronavirus-oil-companies-debt.html

[Lucius]

Black gold is experiencing its worst days, but this is not strange considering that most of the world is in a quarantine and most of the passenger and freight traffic is suspended. It is a classic example of supply and demand, and what happens when something becomes almost worthless. 

But still for those who were a little more aware of the developments in the oil price correlated with the pandemic, one moment was the key to a sharp fall in the oil price (20%), which dragged down all other markets, including stocks and crypto.

The oil crisis began a month ago when Russia refused to go along with cuts promoted by Saudi Arabia and other OPEC producers. In response, Saudi Arabia said it would increase production by three million barrels a day and flood the market. Oil prices and global stock markets fell sharply on the news.

It is obvious that Russia underestimated Saudi Arabia, which turned out to be a fatal mistake that was corrected only a few days ago with a deal to reduce production by 9.7 million barrels a day, which will take effect next month. This industry is simply too big to allow itself to collapse, as many as 10 million jobs are created in the US alone, closely related to the oil industry.

The only positive side of all this is the incredible improvement in air quality and the reduction of pollution.

[stompix]

~.

I guess that's one way to describe a $3.34 billion shortfall.

A Big Four auditor also signed off on their books 6 months ago, which just goes to show how easy it is to hide major frauds even at audited public companies. Crashes and liquidity crises often bring major insolvencies like this to a head. That's what happened here. At $60/barrel they were able to keep the fraud going, but not at these prices.

Yeah, because the barrel was already full, you used the word "fraud" yourself.
So the fund was nothing more than a Ponzi scheme, Ponzi schemes also keep going if people pour money, they won't fail unless one thing happens, let's be real, the main reason was the fraud in the books.
Otherwise, the entire sector would be dead.

And how is that the most important takeaway? Whether there is fraud underlying a bankruptcy doesn't make any difference.

Are you serious?

Even a broken clock is right twice a day. You don't have to pay attention to ZH.

Not the ZH dumbwatch, it shows 25:81.

The issue is the systemic risk the oil industry poses to banks.

I went through the articles you've quoted:

North American oil exploration and production companies have $86 billion in debt that will mature between 2020 and 2024, and pipeline companies have an additional $123 billion in debt coming due over the same period, according to Moody’s.

So, that's 40 billion a year...some from companies that don't have any problems in repaying their debt.
What's 40 billion a year for the entire banking industry? EOS raised 4 billion, EOS!!!!!!!!

And again.. you've omitted a paragraph:

But the entire energy industry is adjusting. Parsley Energy, a leading West Texas oil and gas producer, has devised its 2020 capital budget assuming that oil prices will be in the range of $30 to $35 for the remainder of the year.
Parsley refinanced its debt in February and won’t face a crunch for at least five years.

Considering use of crude oil in making the fuel, there is no rocket launch, no airplane taking off, no cars/trucks/bikes running for next few months and thus kings barrels are just waste with zero demand. This can rupture the shares for oil industry pretty badly I guess.

There is just a slowing demand for personal use, transport trucks are running 24/7 , why do you think FedEx and UPS are hiring drivers?
Same for the agriculture business and many more.

[Twentyonepaylots]

So, this crisis was just the last drop in a 1000 gallon barrel.

I really thought that the situation in the oil industry was pretty bad, but now seeing that ZH is again going full throttle about another disaster I'm thinking nothing will happen. Contrarian betting against ZH's agenda is probably the only thing more profitable thing, I doubt even buying BTC at 1 cent would match that.

But how come it doesnt matter to oil industry in the long run? Surely the industry way to big and it can easily overcome the losses they are recurring right now. But lets just consider the current scenario heading up for over few months since pandemic is severe and we have no antidote for it.

We've been hit by this disastrous pandemic, every one is not prepared on this that's why every one is struggling, every market is collapsing and every one is panicking. For some time, Stock and oil market has a pattern, when stock is up and so does the oil market too, vice versa. We're on a month after some countries declared a nationwide quarantine, we might have not seen the worst effect that it could give the markets yet.

Considering use of crude oil in making the fuel, there is no rocket launch, no airplane taking off, no cars/trucks/bikes running for next few months and thus kings barrels are just waste with zero demand. This can rupture the shares for oil industry pretty badly I guess.

Considering this too, maybe oil market is quite safe even the prices is low since there are no consuming of it that much during this times.

[Febo]

Let's talk about the oil industry.

Oil prices are doomed. Saudis and Russians are using this economic crisis to kill USA shale oil producers. They will succeed at its plan.

[The Sceptical Chymist]

Contrarian betting against ZH's agenda is probably the only thing more profitable thing, I doubt even buying BTC at 1 cent would match that.

LOL, I agree.  Since they're the digital equivalent of some old guy wearing a sandwich board that says "The End is Near" I think they're only going to be right once, and only if we actually experience Armageddon.  And at that point all bets are off anyway.

It may sound harsh, but I'm not going to shed a tear for anyone in the oil industry.  If the market for oil crashes, so be it.  The world ought to have adopted electric vehicles and alternative energy sources a long time ago, and seeing as how it didn't, it's allowed so much greed and corruption to thrive over the years that the end can't come soon enough IMO.  Plus you won't hear many folks complaining about how low gas prices have been--and I hope they drop even further.

[snipie]

Let's talk about the oil industry.

Oil prices are doomed. Saudis and Russians are using this economic crisis to kill USA shale oil producers. They will succeed at its plan.

USA is the last thing to think about for both countries.
Many countries aren't satisfied with the oil prices for years. Those countries are counting mainly for the oil price for their economy since it represents more than 90% of its exportations. I am talking about Venezuela, Algeria, Iran, Gulf countries mainly and Russia too is affected. The economy of these countries is slowing down at an incredible rate, many projects are delayed and some of it is seeking financial help from many ways (Aramco for example)...
This oil price war isn't helping these countries except Saudi Arabia which can get some profits by rising its production which no one else can do.
Now back to USA shale oil industry, it is just a collateral damage imo.

[coinfinger]

The good part is, people are still afraid that "if this bad thing happens to banks, the economy will crash, so we have to save banks in order to save the economy!". Well, I am sorry but banks do need money constantly and they constantly crash the economy and so does all the other companies who have leveraged debts on oil as well.

Maybe instead of letting these huge billion dollar companies ruin the economy and constantly get saved, we could potentially just use 5x that amount that will hurt our finances more than we can imagine for now, yet we could at least never have to worry about anything like this in the future, when you consider world will be back on track to do great in 10 years after such a move, you realize in 100 years we would basically be living in the greatest prosperity the world has ever seen because our money that we work so hard for and still live poorly with it won't go to saving bigger companies anymore.

[LoyceV]

I've been following the oil market a bit during the pandemic, and (without any references) this is what I remember (by heart):

• Oil production was increased by 2 million barrels per day by the Saudis
• Oil demand has dropped by almost 30 million barrels per day
• Next month, OPEC and other countries are going to cut production by almost 10 million barrels per day
• (Strategic) oil storage facilities are quite full, other storages are being filled too
• China wants to increase it's strategic oil reserve while prices are low
• Storages at oil producing countries are being filled too
• Floating storage (oil tankers) are in high demand
• Some say oil prices could go as low as $0 or even negative price per barrel

At some point, oil producing countries will literally have no place to store their oil anymore. I don't know the details of those operations, but in my layman's view, that will mean they have to stop production in order to keep their feet clean from oil.

US tariffs on imported oil would be interesting. It protects their own shale oil industry, while the money stays within their own country instead of being paid for oil abroad. Americans won't like the higher oil prices of course, but keeping the money in their own economy could benefit the US in the long term.

[stompix]

• Some say oil prices could go as low as $0 or even negative price per barrel

Now, this went south pretty fast!

Buyers bidding for crude in Texas, the birthplace of the shale revolution, are offering as little as $2 a barrel for some oil streams, a precipitous markdown from a month ago. The slumping value of physical barrels is raising the possibility that Texas producers may soon have to pay customers to take crude off their hands.

Source

If that BTC crash was brutal, this one is in a league of its own.
And we're still paying over 1euro/l, good old taxes  

China wants to increase it's strategic oil reserve while prices are low

Unless they are planning to fill the 3 Gorges Dam with oil, they will run out of space pretty soon too.

LE:
Out of curiosity, I checked and it seems the dam has a storage capacity of around 3500 days of global oil production. 

[LoyceV]

Now, this went south pretty fast!

Wow! ft.com:

Benchmark US oil prices crashed towards $1 a barrel on Monday, as the collapse in demand caused by the coronavirus pandemic leaves the world awash with so much crude, and so little available storage capacity, that producers may soon be paying for buyers to take it off their hands.

West Texas Intermediate, the US marker, lost 92 per cent on Monday, with the price of oil for delivery next month sinking to a low of $1.02 a barrel, on warnings that traders were struggling to access storage capacity at the refinery hub of Cushing, Oklahoma, which is expected to be maxed out within weeks.

Madness

And we're still paying over 1euro/l, good old taxes  

I paid around 1.50 euro/l last week. Where can I sign up for a euro/l?

Out of curiosity, I checked and it seems the dam has a storage capacity of around 3500 days of global oil production. 

Let's not give them any ideas

So prices drop to almost zero (and possibly lower) because even though you can buy the oil, you can't store it. So I guess shutting down and starting up oil production costs more than just continuing production at a loss for a while.

[Harlot]

It seems like stopping production isn't always their solution for oversupply of their oil, when there is no demand for it their business is practically over. If you think about it most of the businesses that uses oil like air transportation, cargo shipping, delivery trucks have all hit a pause in their businesses as well which means their business will also take a hit whether or not they like it. This isn't avoidable at all and they can't do anything about it. Best thing now for this corporations is to ride this year out in the losing side and hope everything will go back to normal as soon as this pandemic subsides.

[LoyceV]

And there it is:

At one point, oil fell to $-1.43 a barrel.

Note the "minus" sign!

[tomahawk9]

Uhh, what?


source

I woke up this morning, checked Yahoo and it was $10, now it's under $1 a barrel. And it's taking a toll on the stock market.

edit¨* @LoyceV beat me to it...but my pic isn't accurate, it's actually -137% wtf!??

[LoyceV]

Uhh, what?

I can beat that:

[dothebeats]

Uhh, what?


source

I woke up this morning, checked Yahoo and it was $10, now it's under $1 a barrel. And it's taking a toll on the stock market.

edit¨* @LoyceV beat me to it...but my pic isn't accurate, it's actually -137% wtf!??

It's insane. They literally have to stop production instantly else their storage would be filled with oil that no one wants to buy at the moment. China could take up all the oil they could get while the prices are low, but even then I think that they would have a limiting capacity for oil storage. Just a month ago, Saudi announced that they will be ramping up their oil production by 3 million barrels/day. That seemed to be not a good idea after all.

LE:
Out of curiosity, I checked and it seems the dam has a storage capacity of around 3500 days of global oil production.  

Ahh, a fiery dam of oil.. What could go wrong if any country decides to try this?

[LoyceV]

Marketwatch.com explains what this means:

The unprecedented drop in the nearby contract reflects traders scrambling to exit long positions that would require them to take physical delivery of crude amid dwindling storage space. It also reflects a convergence with the physical spot price for oil.

And I still don't really get it! So this doesn't mean oil producing companies are asking a negative price, this means the guys who bought the oil a while ago now regret it and don't want what they bought and paid for to actually get delivered, is that correct?