Oil rallies ahead of Russia, Saudi meeting on price war

 

 Russian President Vladimir Putin chairs a meeting with members of the government in Moscow, Russia, on February 5, 2020.

https://www.foxbusiness.com/markets/oil-price-rallies-ahead-of-russia-saudi-meeting

Oil prices are bouncing back as traders turn their attention to the upcoming virtual meeting between Saudi Arabia and Russia.

West Texas Intermediate crude oil, the U.S. benchmark, climbed 3.6 percent to $24.47 a barrel. Brent crude, the international benchmark, rose 0.7 percent to $32.08

Russia and Saudi Arabia are set to hold a virtual meeting to discuss production cuts that President Trump has suggested could total 10 million barrels per day.

“Look for at least 10 million and a commitment from non-OPEC of 3 million more,” Phil Flynn, senior market analyst at the Price Futures Group, told FOX Business. “If prices get worse, it could cause long-term harm to the global economy.”

WTI crude oil has plunged 63 percent from its Jan. 6 peak as the price war between Russia and Saudi Arabia worsened a supply glut amid a period of severe demand destruction caused by the COVID-19 pandemic.

Following the meeting between OPEC and its allies, energy ministers of G20 nations will meet Friday to discuss the economic damage and the sharp drop in oil prices. The fallout has “cost us future supply that we will need desperately in a few years,” Flynn said. 

Weekly inventory data from the American Petroleum Institute released Tuesday evening showed crude stockpiles increased by 11.94 million barrels in the week ended April 3, more than the 9.3 million barrels that analysts and traders surveyed by The Wall Street Journal were expecting. Last week, inventories swelled by 10.49 million barrels.

The inventory build followed the release of an updated 2020 outlook from the Energy Information Administration that projected global demand will fall by 5.2 million barrels a day as inventories swell by 3.9 million barrels. The EIA sees Brent crude averaging $33 this year – $10 below last month’s forecast. EIA officials also forecast the U.S. will become a net importer of crude oil in the third quarter.

“Did the Saudis win? Maybe,” wrote Stephen Schork, founder and editor of the daily oil subscription newsletter The Schork Report.

“Per yesterday’s forecast from the EIA, the government now expects the U.S. will return to being a net importer of oil (crude oil + petroleum products) in the third quarter of 2020," he wrote. "This will be the first time since June 2011 the U.S. will be a net importer of oil. That certainly sounds like a victory.

Who Owns America’s Gas Stations?

What Happens If The World Runs Out Of Oil Storage?

 

https://www.tankstoragemag.com/wp-content/uploads/2015/06/Map-close-up.jpg 

It was only a matter of time, really. With demand decimated by the coronavirus and Saudi Arabia on the oil warpath, the imbalance between oil supply and demand deepened dramatically, raising the question of what happens when the world’s oil tanks and tankers fill up.

The answer? Nothing good.

Earlier this month, oil data analytics firm OilX warned that oil in storage around the world could reach 1 billion barrels before long. This week, Reuters quoted shipping industry sources as saying that as much as 80 million barrels of oil are hanging out in floating storage. OilX has calculated that this oil in floating storage could be even more, at some 100 million barrels. 

And the number is only going to grow.

Earlier this week, Bloomberg quoted three sources from the Energy Department as saying the department was discussing whether to start renting out federal storage space to local oil producers as their tanks were filling up and there were no quick buyers for the oil they pump. 

Earlier this month, Forbes’ Gaurav Sharma reported that shipping rates for Very Large Crude Carriers (VLCCs) had soared by an insane rate of 678 percent in just one month–to $175,000 a day–to ship crude from the Middle East to Asia. A rate increase this large suggests a massive increase in demand for VLCCs. What’s more, this demand for VLCCs does not coincide with a proportional increase in demand for crude. Traders are hoarding oil.

 

Reuters’ Jonathan Saul notes in his report on storage that the last time there was so much oil in floating storage was in 2009, after the Great Recession. At the time, oil in floating storage reached 100 million barrels. This time it’s anyone’s guess how much oil traders and others would accumulate in storage before the demand situation improves. If forecasts coming in from investment banks and the IEA are any indication, it will be a while before all those barrels are sold.

Goldman Sachs, for one, told CNBC that some grades are already trading below zero because of the devastation the Covid-19 pandemic has inflicted on oil demand.

“Indeed, given the cost of shutting down a well, a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas,” the bank said.

“With demand collapsing but supply rising after OPEC and non-affiliated Russia failed to reach a production cut agreement in early March, global inventories could reach their maximum capacity within weeks,” analysts from Eurasia Group told CNBC, adding “Already, ports and refiners are turning away oil tankers. This will put even more downward pressure on prices and pose an existential threat to many companies.”

The group of doomsayers is large and growing. There is virtually no optimistic scenario about oil demand right now, just a couple of months after the IEA and the EIA predicted continued growth for U.S. shale output to over 13 million bpd, and investment banks forecast stable oil prices. But two months ago, the coronavirus outbreak had not yet become a pandemic. The situation is, according to many, unprecedented, which means the industry and all other stakeholders are navigating a terra incognita.

The answer: whoever wants to survive the crisis without too much pain.

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First North American Refinery Shuts With Fuel Demand Plunging

Newfoundland’s only refinery is shutting down, the first North American fuel maker to be idled as the coronavirus outbreak crushes demand worldwide.

North Atlantic Refining Ltd. will idle the Come by Chance refinery, VOCM radio reported on its website, citing Glenn Nolan, the president of United Steelworkers Local 9316. The plant could be shut for two to five months, Nolan said, according to the report.

North Atlantic, the union and Nolan didn’t respond to emails seeking comment outside of normal working hours. The 130,000 barrel-a-day refinery supplies fuel to eastern Canadian markets and the U.S. East Coast.

While this is the first plant in the region to shut, refineries across the U.S. and Canada are cutting back as the gasoline and jet fuel markets seize up. Measures to slow the spread of coronavirus may result in an unprecedented plunge in fuel demand, with estimates that global consumption is shrinking by 20% or more.

U.S. government data show that the amount of refined products supplied to the market fell by more than 2 million barrels a day in the week ended March 20. With coronavirus cases in the U.S. on the rise since then, and more parts of the country shutting down businesses and limiting travel, consumption has likely slid further.

Valero Energy Corp. has reduced processing rates across about half of its refineries, and Phillips 66 said many of its refineries are near minimum rates. Suncor Energy Inc. said it’s adjusting its refinery utilization. With refineries using less crude, the oil market is starting to seize up, with at least one pipeline asking producers to reduce output.

Refineries globally have been cutting back activity. Last week, Gruppo API SpA indefinitely stopped its Falconara facility in Italy until fuel demand recovers. The nation’s fuel consumption has declined by about 85%, a spokesman for the company said, citing a union of retail gas stations. Meanwhile, huge refineries across Asia are cutting back as billions of people stay home.

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Saudi-Russia Oil Price War: Will It Script the End of Opec?

Saudi Crown Prince Mohammed bin Salman, left, and Russian President Vladimir Putin at the G-20 summit in Osaka, Japan, on Jun. 28, 2019. Jacques Witt/AFP/Getty Images

 

As is customary, Opec is supposed to reach its 60th year this year, and perhaps it will not celebrate this event as expected, this year.

The reason is Saudi Arabia’s decision to reduce and discount the price of selling oil and increase its production, after Russia refused to reduce its oil production.

In Opec, Saudi seems to be punching above its weight, resulting in the breakdown of the joint production agreement between Opec and Opec Plus that came into force in 2017. Saudi Arabia and the Opec had wanted to decrease production by one million barrels per day and ask for a corresponding decrease of half a million barrels per day from its non-Opec partners, of which Russia is one.

This was widely seen as an urgent measure to support market stability in light of the economic impact of coronavirus epidemic, but this proposal was not agreed upon by Russia. Russia had called on Saudi Arabia to increase its production and simultaneously increase the surplus in the market to about 4 million barrels daily in the market of the total promised oil supplies during the next month.

This means that as of April, when the current production cut agreement expires, all producers from inside and outside Opec allies, most notably Russia, Kazakhstan and Mexico, will be allowed production levels as they wish and without a ceiling, which means dumping a market, already suffering from slowing demand, with additional shipments of oil.

Saudi Arabia is supposed to make options that are in line with the current situation of the oil markets in terms of supply and demand and avoid the flare-up of an all-out oil war, which may lead to the end of Opec as it is betting on making use of its sovereign wealth fund to bridge the rift in the financial situation that will emerge as a result of falling prices.

While the need for more reductions in production is in agreement and coordination with Opec members and Russia; regarding future production, the Opec Plus agreement reflects the solidarity and consensual work as a temporary solution between oil exporters. 

This is to maintain the market balance in terms of supplies, consumption, prices and refining capacity of oil refineries in light of the shrinking demand and decline in the global economy.

This decision will negatively affect the economy of Saudi Arabia, as it needs a barrel price of more than $70 in order to be able to balance its budget even though its production cost is only in the range of $7 per barrel.

As for Russia, where production costs are much higher than $20 a barrel, it can balance the budget at a price between $40 and $50 a barrel as it is in a better tax, financial and political leadership position than Saudi Arabia. 

It may enable Russia to win the current oil price war. That said, it depends on the extent of the American-Saudi relations affected by the energy price war and returning to the negotiating table or the drop in oil prices to about $15 per barrel or less soon.

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Crude Oil Trades as Low as at $10 a Barrel in North America Amid Covid-19 Crisis

Crude oil is selling for less than $10 a barrel across key North American hubs as the global demand shock from coronavirus leaves crude with nowhere to go.

The coronavirus pandemic has hit demand so hard that as benchmark futures plunge to their lowest in 18 years, oil is backing up throughout the distribution system, raising the prospect that producers will need to shut in wells.

Some of the hardest-hit areas have been those thousands of miles from export terminals, which would provide the possibility of escape, either to foreign markets or onto tankers as floating storage.

In Europe, the price of crude oil traded during the session at around $22 a barrel.

Refiners across the US, including PBF Energy, Valero Energy, and Phillips 66, are slowing fuel production as restrictions on travel and work reduced fuel and jet fuel demand to a trickle.

North Atlantic Refining will be idling its 130,000-barrel-a-day refinery in Newfoundland, Canada, for two to five months due to the outbreak.

The market is groaning under the weight of this oversupply so much so that US midstream operators such as Plains All American Pipelines have asked their suppliers to reduce oil production because storage capacity is reaching its limits.

Bakken crude in Guernsey, Wyoming, sank to a record-low $3.18 a barrel on Monday, according to data compiled by Bloomberg, while Western Canadian Select in Hardisty, Alberta, was worth just $4.18.

Even oil in West Texas is as cheap as it has ever been.

West Texas Intermediate in Midland was $10.68, just above its all-time low from 1998. And its lower-quality counterpart, West Texas Sour, slid to a record $7.18, the lowest in data going back to 1988.

West Texas Intermediate Light (WTL) traded at around $7.50 a barrel below the WTI Midland benchmark yesterday, said traders, the equivalent of about $3 a barrel outright.

Including transportation costs from the wellhead, that would mean the very light crude is worth near-zero, if not negative, when it comes out of the ground.

Even oil that makes it to a dock isn’t immune from the price plunge, as refineries around the world slow down.

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Oil tanker rates double as demand for storage and transport resurfaces

http://www.tankeroperator.com/ViewNews.aspx?NewsID=11498

Supertanker freight rates were on the rise for a second time in March as producers, refiners and traders scrambled to secure ships to transport crude or store a fast-growing global glut of oil, according to Reuters reports. 

 

Freight rates for very large crude-oil carriers (VLCC) along the Middle East Gulf to China route were assessed at about $180,000 a day on Monday, up from some $125,000 on Friday and a weekly low of about $90,000 a day on March 25, according to several ship broking sources.