"U.S. crude oil futures turned negative Monday for the first time in history as storage space was filling up, discouraging buyers as weak economic data from Germany and Japan cast doubt on when fuel consumption will recover.
Physical demand for crude has dried up, creating a global supply glut as billions of people stay home to slow the spread of the novel coronavirus.
West Texas Intermediate crude for May delivery fell more than 100% to settle at negative $37.63 per barrel.
Meanwhile, international benchmark, Brent crude, which has already rolled to the June contract, traded 8.9% lower at $25.58 per barrel.
The June WTI contract, which expires on May 19, fell about 18% to trade at $20.43 per barrel. The July contract was roughly 11% lower at $26.18 per barrel.
Investors bailed out of the May contract ahead of expiry later on Monday because of lack of demand for the actual oil. When a futures contract expires, traders must decide whether to take delivery of the oil or roll their positions into another futures contract for a later month."
CNBC contributed reporting. Reuters
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When I think of all the BS people used to send me about the end of the world coming as fools burned up the last pitiful remnant of Terra's supply of petroleum. Lawdy! Lawdy! Bless them all!
Well now, you can't sell the stuff at prices that justify production costs. An ocean of floating oil containers circles the earth.
Sadly, the newly achieved US domination of the petro scene is finished for the foreseeable future.
And to make it all sooo much worser, China is a big importer of petro products so they can import it at fire sale prices.
Fire sale? Hmm! pl
This (oil + the virus) is looking like an economic Pearl Harbor. I think BRICS is playing a far better game of chess so far and will win if we don’t replace The Swamp with dedicated people with vision and smarts and who put country above cronyism and self-enrichment.
What has the fluctuating price of oil got to do with peak oil? One is reflection of demand, plus manipulation of the price by producers, and the other has to do with the long term rates of extraction relative to the creation of new reserves by deposition of marine micro-organism and there decay under pressure and temperature conditions only geological time scales. the two are as similar as the price of fish and oranges.
JJackson
Ah! You got it wrong and are not prepared to admit that. Sad.
Sir
You were spot on about Peak Oil. US shale will not die. While shareholders and bond holders will take a haircut today, the extraction technology will continue to improve and their costs of production will decline. As oil prices improve shale production will return. The US is in a strong position as it doesn’t have to be concerned about oil at least for the next several decades.
From a supply/demand perspective, oil density in the west will continue to decline as our economies become more efficient and as solar and nuclear becomes more cost competitive for electricity generation.
An investment maxim is to buy when there’s blood in the streets. We will continue to use oil for at least another couple generations IMO.
The big issue in the short term is going to be the drastic impacts for those economies entirely dependent on crude revenues. The last time crude prices were lower for a sustained period the Soviet Union collapsed. MbS is running massive budget deficits as he keeps his population from revolting against the monarchy. One possible good outcome is there’s going to be less funding for the jihadists in the short term.
Jack,
there are a lot of jobs in oil in the US that will be lost. Since the US has become a exported of oil, there will be a loss of revenue in the US in both the private and public sector. If the price destruction continues, oil companies in the US could face insolvency and then we have to think about bail-outs, further stressing the already US economy. There might be trouble in the bond markets too – and, as Col Lang said, the Chinese can buy up oil at very low prices. I’m glad we are standing up a space force to defend our satellites and to attack theirs.
BTW, huge opportunity for Trump administration. Buy paper futures for May delivery at negative prices and then accept delivery of physical.
This is the real Art of the Deal.
There is oil out there and there will be for a long, long, time. The only determining factor is the price to get it out of the ground. Here in North America fracking has opened the spigot but the price is $40+ a barrel to get it out of the ground. What I can’t fathom is why Canada is pushing through with the Keystone XL pipeline taking tar sands oil from Alberta to Nebraska and eventually to the gulf coast. Obama put the stop to it but the Trumpster reversed his executive order and they started building again this month, although a federal judge just stopped it due to environmental review. Several years ago I read that tar sands oil costs $70+/barrel and that doesn’t include shipping cost. Does Canada know something about the future price of oil or are they just subsiding their oil companies/workers? I sure wouldn’t invest in it.
Jack,
“As oil prices improve shale production will return. The US is in a strong position as it doesn’t have to be concerned about oil at least for the next several decades.”
I disagree.
Putin has made his move to destroy the US shale oil industry. And he did not have to reveal his true intention, MBS has made it too easy. As soon as the shale oil industry collapsed and most everybody in shale oil went out of business, oil output will be reduced again to the point it is north of 60$ per barrell (the break even point for shale oil).
Does anyone know what the state of the US Strategic Oil Reserve is?
If the storage tanks aren’t full then now is definitely the time to top ’em up.
Heck, Trump must be able to find someone willing to pay him to fill up those storage tanks.
Yeah Right
That is what he said yesterday and, yes the salt domes are being topped off.
Salt domes? Well, I learn something new every day.
TonyL,
“oil output will be reduced again to the point it is north of 60$ per barrell ”
All that shale oil is still out there. It will be cheaper to extract the next time around as the knowledge, skills and ability are abundent and there will be plenty of actual pieces of equipment on the books of banks that don’t want, need or are capable of using. What’s the scrap value, that’s what its worth, unless the bank cuts a deal for part of the revenue in lieu of cash to get the industry going again. It wouldn’t take long.
Yeah Right, The SPR has room for an additional 75M bbl and can accept 500K bbl per day (can’t find link at the moment). I recall reading SPR contains a variety of grades to support US refiners, so a barrel is not completely fungible. This morning the June contract is dropping very quickly into the teens.
Re-assembling the hardware and personnel to re-start fracking will be non trivial. Exploration & Production companies confined to that space will go belly-up and default on their bonds. The majors will be wounded. This could last a very, very long time.
Eric, the Space Force will rely on the likes of Lockheed-Martin (of F-35 fame) and Boeing (famous for the KC-46 tanker, CST-100 Starliner and 737 Max) for its enemy satellite-killer hardware. I’m not sure how well we should sleep at night with these guys in charge…
Both Iowa and Kansas now get 40 percent of their electricity from wind, which outstrips coal in both.
The pain the coronavirus lockdown is bringing is also hurting the renewables, but they are potentially far more resilient than coal. Farmers hurting because food demand has decreased will still pick up some revenue from the wind and solar farms on their property, since people will still need air conditioning this summer. Moreover, research and development is making wind and solar ever cheaper, and so when the economy roars back a year or a year and a half from now, new wind and solar projects will likely be even less expensive than they are now, and coal will be dead in the water. — Juan Cole
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You are making a common mistake of conflating stock and flow. One can drown a dehydrated man.
At $10/bbl you’ll get to see peak oil very soon.
Brad Beago
Good! Bring it on!
Petno10
what evidence have you that “stock” is limited?
Eric and TonyL
The oil E&P business goes through cycles. It wasn’t too long ago that Houston went through a bad patch.
Shale oil is not going away. Yes, this collapse of crude prices will hurt shareholders, bond holders and employees in the shale, offshore and pipeline sectors. Smart investors with long term perspectives will buy at the discounts on offer as they know commodity cycles. There will be another cycle up. And the technology will improve as it always does.
What shale has proven is that the US can no longer be held hostage by foreigners. We have the ability to meet our energy needs.
What we shouldn’t have are bailouts of equity and debt holders. They took the risk and when the going was good they profited. Those that will inevitably be unemployed will receive benefits under various programs we have including unemployment insurance. Of course they will hurt as it will not correspond with the wages they received. Remember bankruptcy doesn’t mean the enterprise shuts down entirely. They get restructured. A mistake many investors make all the time is to project the present into the future.
The emerging market economies should be throwing their hats in the air that oil is so cheap. The amount of pressure on their FX reserves is mounting, but this relieves some of that pressure. I personally don’t think it’s enough of a pressure release valve, but it certainly helps.
The US has printed trillions of dollars in the past few weeks, yet the USD has appreciated against EM economies. What is coming next is going to be absolute and utter carnage. If it gets bad, the USD might fail as a reserve currency not out of weakness, but because of its strength.
The Saudis will then be up a shit creek without a paddle.
Fred,
“It will be cheaper to extract the next time around”
Perhaps. But the shale oil projects to come will have no business plan that would justify the start ups if the oil price is kept a tad lower than their break even price point. After a long dormant period, all the shale old infrastructure would become scraps. If and when they can start up again, there would be another oil price war. Rinse and repeat.
TonyL,
“if the oil price is kept a tad lower than their break even price point.”
1. What would be the new break even price given the write-off of captial costs by banks?
2. What OPEC government collapses firsts because the breakeven price of oil generates less revenue than needed to run that country due to current and expected global demand for oil?
3. What is the effect of an import tarriff by the US on oil that would otherwise be processed by US based refineries? How would such a tarriff affect OPEC members?
4. What other political “deals” could be made with individual OPEC countries to negate the effect of OPEC led market manipulation that is intended to destroy the shale industry, at least in the short term?
“After a long dormant period, all the shale old infrastructure would become scraps.”
How many years will OPEC have to keep this up for that to happen?
eakens
I think you are right about prospects for the dollar. Jeffrey Snider who has much intelligent to say on the subject, describes the theoretical scenario as King Kong Dollar.
https://alhambrapartners.com/2020/03/25/collateral-shortage-goes-global-hinting-at-the-way-the-eurodollar-reaches-its-eventual-end/
Enjoy your “Peak Oil” laugh, the current situation is defined by an inelastic supply chain and the CoVid-19 economic downturn.
Long term, the US Oil Industry will hinge on the EROEI and the erosion of the U$ Dollar as the world’s reserve currency.
Barbara Ann:
Yes. Question is what comes next. Gold? Bitcoin? Debt Jubilee? Trump has replaced each and every one of the board members of the Federal Reserve except Lael Brainard. I would suggest to others here that they visit the names of those that have been replaced, and historically held the chairmanship, and see who he has replaced them with.
Something is afoot, and I think it is going to be big. Perhaps some sort of consolidation of the Central Banks is my guess, with China and Russia being left out in the cold.
Yeah, Right, I think most of the U.S. strategic oil reserves are located in TX & Louisiana, near the Gulf
Barbara Ann and eakens,
I’m willing to bet the USD will remain global reserve currency for at least the next few generations.
What many don’t get is that USD didn’t take over from GBP overnight and not by some committee decision. It happened by natural forces over a period of time.
What do you think the taxi driver in Buenos Aires or the oligarch in Moscow, London or NYC and the majority of Xi Jinping’s private stash is going to be in – gold, bitcoin, CNY or USD?
All the petrodollar conspiracists, the China Yuan supremacy crowd now, just like the Japanese Yen taking over in the late 80s and then the think-tank opeds of the euro becoming dominant, continue to be proven wrong, yet they persist. Mostly because of their hatred of the US.
No doubt our policy makers keep screwing up big time especially the Ph.Ds at the Fed. But thats more a reflection of capture by the financial oligarchy than anything else. No world power ever dismantled its production capacity and shipped it overseas to an enemy state in the history of the world as far as I know. I wouldn’t bet on that being a permanent state however.
eakens
Tantalizing. Feel free to expand on the significance of the personnel changes at the Fed (with our host’s indulgence). My working hypothesis is that the Fed is clueless as to how to extricate itself from the sudden emergence of very real Triffin paradox problems brought about by the virus-induced global trade shock.
Alastair Crooke’s latest piece over at Strategic Culture highlights the impossible position the Fed is in with this crisis.
The Fed clearly cannot bail out the world, but not doing so runs the very real risk of a systemic collapse in the dollar-based trade system.
In my mind any question of what, if anything, ultimately replaces the dollar-based international trade system must first deal with how (and indeed if) the transition from the very wobbly status quo can be managed.
I confess I was a peak oil fan boy. And I am glad to say I was wrong.
All
I suppose some of you have noticed that entropy has set in and many connected systems have started to break down bit by bit. A lack of people available to keep them working has started to have an effect.
Col.,
Yes, and it will get worse as it is apparently the intent of a few governors to drive as close to the edge of collapse as possible. Michigan’s governor is refusing to even consider opening the UP, with all of 11 deaths, yet tomorrow is going to attend yet another ‘townhall’ organized by a lefty group demanding a rasise in the minimum wage. (This time they are only fighting for 12 though, not 15.) As to the international oil system I’m curious just what is happening in Venezuala, and as a side note, just what is going on with the ilicit drug market (other than some stockpiling on the Southern border).
Yes, well put Colonel. A certain poem by Yates springs to mind.
Related news straight from Bizarro World: the Australian government has decided that it will take advantage of current oil prices to establish it own Strategic Oil Reserve.
To be stored – get this – in the USA.
Apparently there are no salt domes to be found anywhere on the Australian continent.
I suppose we also store our gold reserves in Fort Knox because, you know, why not?
That’s if we have any gold reserves, which is not a given.
https://twitter.com/jessefelder/status/1253343271184666626?s=21
Of course that depends on how long those checks keep coming.
Colonel
The entropy you highlight and the first signs of systems breakdown remind me of E M Forster’s wonderful The Machine Stops.
blue peacock
TINA is a mighty powerful argument for the the dollar not being replaced by an alternate reserve currency. But the eurodollar machine cannot be allowed to stop, else all else will as well.
Digging/sucking up and selling/shipping our back yard read West Texas/Mountain West+Dakota fracking and peak oil never made sense. The same holds true with exporting the nation’s finite mineral and water resources. Once they’re gone that’s it..none of it is coming back to the America left on this side of the River Styx.
The continued digging/pumping up and selling the nation’s natural resources for short term domestic and foreign private gain…I guess it’s the American Way. America is better than that I’d like to believe.
blue peacock:
a. Gold and BTC/USD price action would seem to be suggesting not all is well. Still, I’m not saying the USD isn’t the cleanest dirty shirt, but what I am putting for is that there is too much dollar denominated debt worldwide that cannot be paid back. The IMF doesn’t have nearly enough of a bazooka to deal with this ticking time bomb. The defaults are coming, whether you like it or not. That will make the debts less and less likely to ever be paid back, creating a feedback loop that is going to cascade through emerging markets and developed markets.
So how to deal with it. One option is the debt is forgiven, and another is that an alternate reserve currency will need to come into existence. That alternate reserve currency may incorporate the USD, but something has to give.
Barbara Ann:
It’s unprecedented in modern history that the cultural make-up of the FED has changed so drastically in one administration. The same can be said of the judicial bench. The merging of the Treasury and Fed through what is essentially nationalization of debt (and by virtue of that equity when it can’t be paid off) is also unprecedented. Many disparate forces are merging, but we may wake up one day and realize they were not distinct.
I still contend the Federal Reserve is going to basically going to involve some international merger of the Central Banks of other debtor countries. It won’t be outright, but it is going to some scenario that expands the US sphere of influence.
And just like that, WTI crude is no longer “we’ll pay you to take it off our hands”. Sadly none of the media pundits noticed that other oil prices never had that problem.
https://oilprice.com/oil-price-charts/45
eakens
Offshore banking and OTC markets which is where all the eurodollars trade is functioning normally. As global trade grew, eurodollars grew. As with any financial cycle leverage also grows. Global trade has been decelerating for sometime. Leverage has been continually rolled over in the anticipation of renewed growth in trade and financial speculation. But that wasn’t happening. So eurodollar liquidity has been waning as folks began reducing exposure. This is a normal behavior as risk is curtailed.
There is a reason why the idea of bankruptcy was enshrined in our constitution couple centuries ago. They knew then from experience that in boom times human psychology projects it out to the future and when growth wanes so does speculative fervor. Those caught offside need a way to restructure. Balance sheet repair is essential for renewal.
Preventing this natural restructuring to restore healthy balance sheets in order to protect failed investments is what’s new. Central bank monetization of failed financial structures is extraordinary. This only exacerbates and prolongs the misery. Dollar debt in emerging markets and here needs to be restructured not continuously rolled over and expanded. Equity holders and debt holders need to take haircuts and become more circumspect in their future investments and not bailed out by central banks debasing the money stock. Those that acted prudently and have liquidity should be rewarded as they can pick up good assets at discounts and restore real growth with sound investments and management. Until of course the next speculative cycle begins.
Central bank and government intervention in this process of exuberance and despair only increases the amplitude of each cycle. Despite the fervent belief of the Ph.Ds human behavior of fear and greed has not been repealed.
Gold and BTC markets are microscopic relative to the size of dollar markets. Just look at the volume of fx trades daily. They play a role in speculative trades as dollars slosh through them based on investor sentiment. The plumbing and mechanics of trade finance is all in dollars. You’re talking trillions of cross border transactions. That scale can’t be replicated overnight or even in decades.
Fred,
Sorry I did not see your post above.
Regarding:
4. What other political “deals” could be made with individual OPEC countries to negate the effect of OPEC led market manipulation that is intended to destroy the shale industry, at least in the short term?
In my opinion, this is the key in solving this problem. We cannot win this oil “war” with shale oil industry being the target of oil producing countries, from time to time. Russia and Venezuala should be our friends. Unfortunately the neocons and neolibs would not accept this, and they are practically running the country right now.
With Rosnef in Venezuala became Russian government property, US cannot invade this country like it did to Iraq (note that I did not believe oil was the main reason for the invation). Putin has been always one move ahead in the chess game.
Tony L,
Thanks for your response. You left out items 1,2 and 3. Rosnef now owns some a derilict company with an exhausted capital base located in a socialist dictatorship? Good luck to them.
“shale oil industry being the target of oil producing countries, from time to time.”
That is precisely what OPEC has been doing to the US and Western economies since ’73.
Fred,
Items 1,2 and 3 are beyond my ability to discuss intelligently at this point.
“Rosnef now owns some a derilict company with an exhausted capital base located in a socialist dictatorship”
I can’t argue with that “socialist” moniker . But that’s Russian business and they have become Venezuala protector (like has Syria has been). And the business of Venezuala should not be of our concern. What our concern should be is to have a cordial relationship in trading and oil industry development with Russia and Venezuala. The neocons have been gunning for Venezuala and they never give up. And so have been the neolibs for Russia. And I think we should not be messing with other countries business, unless it is really in our national security interest.
Barbara Ann,
Offshore banks create eurodollars and as they expand they create new assets. They also package these dollar assets into securities for sale to investors. Fractional reserve banking uses the credit multiplier. During boom times, as companies cash flows grow on paper they have the ability to show sufficient capacity to service the debt. Many debt covenants have CLTV ratio tests and other such protections. However, in boom times as financial institutions compete for asset growth both pricing and covenants get relaxed.
With central bank artificially suppressed rates, and even negative rates in Europe & Japan there was a mad scramble to acquire ANY yield further relaxing lending standards. Naturally this led to financing on projects which would not have received funding under a more natural rate environment as the hurdle rates would have been higher. Creating excess capacity and allowing the ability of even financially weak businesses to compete. Add to this that the Chinese banking system has been on steroids with no regard to credit quality, financing all kinds of marginal projects particularly in infrastructure and export driven industries.
This backdrop needs to be taken into account.
As the volume and profitability of global trade began to decline a while ago, many of the businesses began having difficulty servicing these loans. As NPLs and the prospect of them began to rise, eurodollar lending began to decelerate. Add in the tariffs and other sand in the gears of global trade. This has increased the need for more higher quality collateral in the inter-bank lending market. One of the features of the eurodollar market is that the Fed and US banking regulators have no control over asset creation growth as these are offshore banks beyond the reach of US regulators.
One of the flaws in Jeff Snider’s analysis is that he fails to take into account the possibility that all the underwater eurodollar debt can be restructured. That would naturally increase the bar for new lending as offshore banks take a hit to capital and the weaker financial entities would need to raise fresh capital. Restructuring are not painless events.
Recall the S&L crisis. The Fed didn’t bail out creditors and shareholders and particularly managements of these enterprises. Those with capital were able to buy all the S&L assets from the RTC at clearing prices. OTOH, remember the trouble the big money center banks got into lending into Latin America in the 80s and the Brady bonds to essentially bail them out. Recall the dollar mortgages in Scandinavia and Spain that went belly up in 2008-2009.
With global trade slowing, commodity & manufactured goods prices declining, dollar cash flows are declining in export driven economies. Couple that with flight to safety as the dollar rises against nearly all currencies. There’s very little the Fed can actually do. It can take risk onto its balance sheets by offering currency swaps lending on the basis of other countries deteriorating credit quality sovereign debt. All that does is postpone the day of reckoning for all the malinvestment that was financed. Another approach is to do nothing. Let the system clear and have the unpayable debt restructured as was done during the S&L crisis. Let the Singaporean property developer or the Brazilian mining company or the Vietnamese apparel manufacturer or the Chinese steel company be forced to restructure their capital stack. That’s not what the financial oligarchy want. If the Fed had to do anything it should have leaned against the credit boom. But then ….. Instead we have the heads I win, tails you lose financial system.
.