Collapse of crude oil prices

[snipie]

Everyone now is asking how to buy some oil barrels lol.
Production >> demand, no place to store it as it is barely full, long term contracts are getting hard to be signed and the producers are paying you to do this. That's a nightmare for them!

[Smitty Werben Man Jensen]

I really do not know what happened to OIL prices, had experienced a terrible decline throughout history, and a very drastic increase up to 200000% in a day, that's a new record in my opinion, is this market manipulation?

[LoyceV]

is this market manipulation?

OPEC is a cartel, of course they manipulate the market!

[stompix]

Your argument doesn't actually suggest the oil industry is in any way robust in the face of collapsing oil prices, or that banks would be unaffected. You're just saying, "hey look over there, fraud!"

Hihi, first you would have to realize that I'm not at all arguing at how robust the oil industry or the banking industry is or how invincible and unpenetrable and unfu$#$ it is, they can be hit they can bleed money but not just from this little blow.
I'm just pointing at the overreacting and exaggerations that have made ZH such garbage, and I'm also pointing at some flaws you have in your reasoning. Rather than trying to arrive at a conclusion based on the information, you are trying to pick bits of info so that you arrive at the point you want to!

Take for example your starting point, you've selected a troubled company (which cooked its books with a lot of sauce)  and you're trying to paint this situation all over the industry. At the same time, when I give you a good example, you dismissed it because one company out of 100 is not relevant, this is not analyzing facts, it's picking the facts that back up your analysis.

Are you?
The point of this thread is that banks are heavily exposed to oil companies, who are unprofitable or collapsing due to low oil prices, which poses systemic risk to the banking system.

So it is a risk or a certitude? Because you were pretty certain things will happen! That's why we have this debate after all!

I would change my tune on the oil industry when WTI is trading above $50 a barrel again, because that's the minimum before even the most profitable US producers can get cash flow positive.

You know that's not true and you know that oil is just like bitcoin mining, You're not making money at 6 cents per kWh normally but if enough people drop out of mining you might make profits even at 8. If some of them shut off their production the supply and demand ration will take care of the rest.

I really don't know what's going to happen but it seems silly to assume oil prices are just going to skyrocket in the near future to bail out the oil industry. Most of the commodity markets I watch are standing on the edge of a cliff too. Anything can happen, even a miraculous recovery from here, but I'm not going to stick my head in the sand given the market conditions. 2008 is still fresh in my mind.
The sentiment I see when I look around also seems way too optimistic. So many analysts are like, "Crude oil just dumped below $0 for the first time ever? Nothing to see here, move along! Everything goes back to normal next month!" We'll see about that.

Let me tell you something, I've been through a lot of far worse situations in my life, not family or personally related.
I've endured the communist regime, I saw the warsaw and caer pacts crumble, I saw inflation above 1000%, I saw a recovery period and another crash at the end of the '90, I lived through 2008 which was like a breeze compared to the previous ones and every time people were acting like it is the end of the world.

It wasn't! Nor were the hundreds of pandemics not the hundreds of crashes, life will go on, the economy will recover and we will be back consuming and producing and drilling for oil and burning it..... If AOC won't be elected president!
You're underestimating the recovery potential of this flawed (considered by some) economic model.

But as you've said, I'll have to add some tickers and let you know when WTI hits 30$ and 50$!  
And you own me a PM when the entire shale sector is dead for good!

it will cost probably an insane amount to store it anywhere if there is still room for any.

I can see a business model where you fill abandoned oil wells with fresh oil again, and make a profit doing so

Unfortunately, it won't work for most oil wells at the end of their life circle. Most of the late recovery oil is forced out through different methods from water to thermal heating, so trying to inject oil back it will be more costly from an energy consumption point of view than getting it out in the first place.
The simple solution would be oil pits, dig 5m deep pools over a 1km2 area and be careful not to let gas accumulation happen.
Venezuela actually used open-air oil pits to store a lot of oil when its infrastructure crumbled and they weren't able to move it from the exploration areas. But good luck dealing with the environmentalists.

It is strange. I believe that this is the first time something like this happened. Not two World Wars has crashed the Crude Oil market to negative prices.

There was no "oil price" during the world wars, nor were the same markets as we have now in place.
And if they were, the demand for oil would have pushed the price at insane levels, remember that Nazi Germany was trying to produce synthetic fuel at insane costs just because they didn't have any alternative. And,even by ww2, the Saudis couldn't flood the market with oil  
 

[plast555]

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?

What a week ago OPEC (Oil producing and Exporting countries ) has agreed to cut the production of oil for about 10Million barrels per day in the month of May and June which is around 20% of their production level and literally the demand has seen a sharp fall because of the pandemic situation so things might improve a bit in the May and June but it will take few more months for the demand to return

[RealMalatesta]

I really don't know what caused the prices to dump like that and increased but I can only speculate on what could happened in between at the very least. You can have crude oil not only in physical format but also you can get some from the stock market type investment banks as well, not really that common but crude oil is a commodity that you could purchase there, you are not really the owner of physically a barrel for example but you do have digitally purchased one, can't cash it out, can't call it to your house for example, but they just assume there is a barrel out there which is owned by you.

If the prices dropped so low that one liter of WATER is more expensive than a liter of crude oil, that means a lot of people all around the world, a big huge global movement happened that bought oil right away yesterday which caused it to go back up a bit.

[mahilchii]

Well, no one expected this as the price drops massively after 20 years if I am not wrong, With the global economy in a complete stand there no demand for any new oil. So undoubtedly the price might drop this also collapse will be unforgettable for everyone, however let's believe things will get sorted out in few days!!!

[Twentyonepaylots]

Everyone now is asking how to buy some oil barrels lol.
Production >> demand, no place to store it as it is barely full, long term contracts are getting hard to be signed and the producers are paying you to do this. That's a nightmare for them!

lol yeah, I've seen some folks talking about where they can buy stock of oil as if there is a person who sells for free The oil price crash is not what it really looks like, the price did crash because there were no demands so as you guys can see there is a massive price dump from oil industry but it does not mean anything.

[mersal]

Everyone now is asking how to buy some oil barrels lol.
Production >> demand, no place to store it as it is barely full, long term contracts are getting hard to be signed and the producers are paying you to do this. That's a nightmare for them!

lol yeah, I've seen some folks talking about where they can buy stock of oil as if there is a person who sells for free The oil price crash is not what it really looks like, the price did crash because there were no demands so as you guys can see there is a massive price dump from oil industry but it does not mean anything.

The dump created due to oil trade war, if they acted early and reduced the production level then they are not in such situation as now.Anyway the country USA is going to get affected due to the crude oil price collapse but in reality no people in this world will get the benefit for the price decrease because they were forced to buy for higher prices even when the barrel price is in negative value.

[bitgolden]

Oil prices may not recover forever as world automobile industry slowly started adopting renewable energy resources wherever possible.

One day or other, crude oil producing countries must need to face the situation like this as all petroleum related resources are limited but unfortunately they might not be expecting this much drastic fall of crude prices due to a pandemic. I guess this covid19 outbreaks shows some trailer of what are things we may go facing in next decade or in 25 years if we keep ignoring destroying nature and not thinking about making use of renewable energy possibilities. Not sure how many governments will learn lessons from this pandemic.

[Maestro75]

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

This is the one that even scares me of all the business falls since this coronavirus epidemic started. Oil is a vital part of most economies of the world. However the Bret Oil is not that badly affected as the price has remained above $20 per barrel and not like the American oil which is now in the negative.

[Febo]

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

This is the one that even scares me of all the business falls since this coronavirus epidemic started. Oil is a vital part of most economies of the world. However the Bret Oil is not that badly affected as the price has remained above $20 per barrel and not like the American oil which is now in the negative.

You can pause and stop oil rigs but you cant pause and stop shale oil fracking without huge cost of restarting it again. Also a lot of USA refineries are on Mexican gulf in Huston and New Orleans. You cant transport oil there from North of USA. Those Refineries still use Saudi Oil. And plenty of tankers is on the way there from Middle east.

[FanatMonet]

The main problem of oil is that the market does not offer physical oil directly, but simply papers that are backed by it. Because of this, a collapse occurred, because speculators just wanted to make money, but they had to sell even in the red, because if they didn’t sell, they would have to take physical oil.

[Wind_FURY]

is this market manipulation?

OPEC is a cartel, of course they manipulate the market!

Headlines with the most probability to trend starting 4th quarter of 2020, and for the whole year of 2021, "Oil spills". The over-supply of Crude Oil must go. Hahaha.

[LoyceV]

The main problem of oil is that the market does not offer physical oil directly, but simply papers that are backed by it. Because of this, a collapse occurred, because speculators just wanted to make money, but they had to sell even in the red, because if they didn’t sell, they would have to take physical oil.

It seems a bit weird to me that every barrel of oil gets sold almost 30 times. The number of trades by people who never even come close to any physical oil is rediculous.

This also makes me wonder what price the oil itself is sold for. When the "speculators" sold a barrel for $-37, as far as I understand the oil producing company still gets a positive price for it's oil.

[onrise]

Everyone now is asking how to buy some oil barrels lol.
Production >> demand, no place to store it as it is barely full, long term contracts are getting hard to be signed and the producers are paying you to do this. That's a nightmare for them!

This is the first time I am haring that prices have slip in negative and people are even not ready to buy because the storage is much more expensive than even buying this contract. So hardly demand for the future contracts in buying side as well. This is happening because of the several countries under lock down and thus there is not much consumption happening and as a result the storage capacity is almost full of US now who is the biggest exporter of all.

[exstasie]

Your argument doesn't actually suggest the oil industry is in any way robust in the face of collapsing oil prices, or that banks would be unaffected. You're just saying, "hey look over there, fraud!"

Hihi, first you would have to realize that I'm not at all arguing at how robust the oil industry or the banking industry

Okay, well that's the topic at hand, so......

I'm just pointing at the overreacting and exaggerations that have made ZH such garbage, and I'm also pointing at some flaws you have in your reasoning. Rather than trying to arrive at a conclusion based on the information, you are trying to pick bits of info so that you arrive at the point you want to!

You haven't refuted anything. You've pulled some random numbers out of your ass and done some irrelevant hand waving that has nothing to do with the topic.

Nothing I'm saying hinges on anything ZH has ever said. I didn't mention a single piece of data from ZH. Let it go.

And what conclusion was that anyway? That the threat of bankruptcies and defaults on a large chunk of the energy bond market poses a systemic risk to banks, who may soon be reeling from losses in commercial and consumer loans? What is unreasonable about that?

Take for example your starting point, you've selected a troubled company (which cooked its books with a lot of sauce)  and you're trying to paint this situation all over the industry.

Actually, I pointed out that the industry is highly leveraged and highly unprofitable and provided a multitude of data to that effect. I used Hin Leong as a single example of how the collapse of oil prices can catalyze the demise of struggling oil companies. I used Whiting Petroleum's recent bankruptcy as another, then pointed to the ~100 industry bankruptcies expected over the next year to emphasize the sector-wide risk.

I'm getting a little tired of you ignoring 99% of what I write and then completely misrepresenting me. Try responding to my last post next time, instead of repeating nonsense arguments about the OP which I've already responded to.

At the same time, when I give you a good example, you dismissed it because one company out of 100 is not relevant, this is not analyzing facts, it's picking the facts that back up your analysis.

First, you are confusing two different articles. That company was presumably not included in the ~100 expected bankruptcies.
https://www.cnn.com/2020/04/02/business/oil-crash-bankruptcies-whiting/index.html
https://www.nytimes.com/2020/03/20/business/energy-environment/coronavirus-oil-companies-debt.html

Second, I dismissed it as being indicative of the entire sector for good reason: that company refinanced its debt months ago. No other companies in the industry can refinance debt now because no banks are funding energy bonds anymore. On top of that, their 5-year projected cushion is based on oil holding above $30. Oil is trading at $10 now, meaning they could go broke years earlier than projected.

Third, I never said every company in the industry would go bankrupt. Even then, Parsley was supposed to be an example of one of the well-capitalized oil companies. At $10 a barrel they are broke in 1.5 years based on their own projection. Will oil still be trading at $10 by then? Probably not, but this has to make you wonder about the companies that are struggling with principals due in 2020 or 2021. And while I don't expect this, if the global economy goes into a long term depression (like the 1930s) then the entire US shale industry will probably go under. In another Great Depression type context, who can compete with Saudi Arabia at $2.80 a barrel? Nobody in the US.

Are you?
The point of this thread is that banks are heavily exposed to oil companies, who are unprofitable or collapsing due to low oil prices, which poses systemic risk to the banking system.

So it is a risk or a certitude? Because you were pretty certain things will happen! That's why we have this debate after all!

I have spoken repeatedly in terms of risk and possibilities. The emphasis on certainty is just one of your inventions:

The oil crash threatens to push highly leveraged firms into bankruptcy

This may be the first domino to fall in that respect.

the collapse of oil prices can act as a catalyst for shuttering already struggling oil companies.

This is one systemic risk among several to consider.

I really don't know what's going to happen but it seems silly to assume oil prices are just going to skyrocket in the near future to bail out the oil industry.

I would change my tune on the oil industry when WTI is trading above $50 a barrel again, because that's the minimum before even the most profitable US producers can get cash flow positive.

You know that's not true and you know that oil is just like bitcoin mining, You're not making money at 6 cents per kWh normally but if enough people drop out of mining you might make profits even at 8.

Another terrible analogy. Oil does not have a difficulty adjustment algorithm. Shale production is extremely capital intensive no matter what. $50-55 a barrel is the break-even cost of production in the US shale patch, period. https://www.cnbc.com/2020/04/02/coronavirus-whiting-petroleum-is-just-the-first-domino-to-fall-in-us-shale-wipeout-strategist-says.html

If some of them shut off their production the supply and demand ration will take care of the rest.

Nobody cares if oil companies go belly up. The issue is how leveraged the sector is and what happens if a big chunk of the sector does go belly up, in terms of banking liquidity, and given the expected liquidity crunch in Q2.

Something to keep in mind as we rationalize why Trump is now trying to get a direct bailout for the oil industry, even though it would be incredibly unpopular with voters:
https://www.reuters.com/article/us-global-oil-trump/trump-calls-for-us-oil-industry-bailout-as-prices-plunge-idUSKCN2231Z6

Let me tell you something, I've been through a lot of far worse situations in my life, not family or personally related.
I've endured the communist regime, I saw the warsaw and caer pacts crumble, I saw inflation above 1000%, I saw a recovery period and another crash at the end of the '90, I lived through 2008 which was like a breeze compared to the previous ones and every time people were acting like it is the end of the world.

It wasn't!

Who is talking about the end of the world?

All I'm talking about is the possibility of a banking crisis like 2008.

[stompix]

Two things first:

Third, I never said every company in the industry would go bankrupt.

Good, at least now we have a common view on this.

I'm getting a little tired of you ignoring 99% of what I write and then completely misrepresenting me. Try responding to my last post next time, instead of repeating nonsense arguments about the OP which I've already responded to.

That fact that pissed me off about Hin Leon is that you dismissed the fraud happening there as a catalyst but at the same time you ignored the fact that companies that don't have the same problems will never face the same issues and from the same article I gave you an example, the guys that knew how to shield themselves have done so.
From the moment you said that the fraud was irrelevant in the bankruptcy it's getting a little hard to ignore and get over it. No matter how many good arguments you bring to the table, that thing will still be there, like a tiny red dot on a cashmere sweater.  

First, you are confusing two different articles. That company was presumably not included in the ~100 expected bankruptcies.
https://www.cnn.com/2020/04/02/business/oil-crash-bankruptcies-whiting/index.html
https://www.nytimes.com/2020/03/20/business/energy-environment/coronavirus-oil-companies-debt.html

"Those factors will almost surely",  "may not survive"  "gas producers could file for" "could potentially spike to 30%"
Assumptions, assumptions, and again assumptions.

I think I heard those somewhere else long (or maybe not that long) time ago.
Yeah,a broken clock is also right twice a day, but good luck trying to make it point to 2016 again  

In another Great Depression type context, who can compete with Saudi Arabia at $2.80 a barrel? Nobody in the US.

Oil at 20$ crumbled the URSS, oil again at 20$ again made Russia default on its debt twice in a decade.
There are a lot of state-owned producers who are in a far worse situation than the shale producers because, in the case of private companies they can be helped by the state, in case of Rosfnet or Aramco, they're the ones that need to help the state , when they fall the country falls. The US has a lot of ways to help them, the others have none. One serious move from Trump against imports or printing a few more mickey mouse checks and the tables would be reversed for good and forever.

Another terrible analogy. Oil does not have a difficulty adjustment algorithm. Shale production is extremely capital intensive no matter what. $50-55 a barrel is the break-even cost of production in the US shale patch, period.

Oh but it's perfect, why did the shale start? Because there was a lot of money to be made, just like mining bitcoins, miners flocked to it, and then we had smaller revenue per $ invested and the ones with GPU and FPGA dropped one after one, same for every generation of Asics. If mining farms shut down the same bitcoins would be minted and the reward will be split between a lot less, just how the ones that survive the oil crash will be able to sell it at a higher price than now. And do you think mining is still a home basement business? We have around 3 billion worth of mining equipment right now in place, it's no longer child's play.

It's the same, if BTCPEC decides everyone would cut their hashrate by 10% they will have the same revenue with less power consumption.
When bitcoin dropped to ~4k for a week 15% of the hash rate was gone and even now it's not back to the same levels as of March!
How is that different? It's not  
People with s9 shut them down, people with solar kept them on and still went mining, even happier than before.

[el kaka22]

It is still not recovered from the initial big fall, I know it is not as low as couple days ago but this was over 60 dollars when the year started and now it is around 10 dollars, that is still a huge drop that needs to be recovered before we can talk about good days.

Surely there must be a lot of investors trying to find as much as possible but the crude oil is something you have to store and the storage are full right now, so all that can be bought is already bought, I don't know what else they can do about it if there is absolutely no place to store the ones you buy. The production has to get lower and lower in order to meet the demand, if they continue to produce at this pace while there is no place to store them, price can't recover at all and will even continue to fall.

[Gozie51]

I really do not know what happened to OIL prices, had experienced a terrible decline throughout history, and a very drastic increase up to 200000% in a day, that's a new record in my opinion, is this market manipulation?

The reason for the collapse is just no demand. Demand in simply term is request for a commodity and when it does not happen, no supply or delivery. That means at the time now, only production can go on and no utility or end use so price will go down automatically.