Last contango in Harris (County)

The crude trading week that was gave the market a day that will live in infamy. For on Monday, April 20, 2020, the soon-to-expire WTI May contract – lost all its value, slid to zero and then went into negative prices for the first time in trading history eventually settling at -$37.63 per barrel down over 300%. 

Blame a supply glut that Harris County, Texas, US – home to America's oil and gas capital of Houston – is only too aware of, or blame the dire demand declines caused by the coronavirus/Covid-19 lockdowns around the world, or blame money managers holding paper barrel or e-barrels desperately looking to dump their holdings at the last minute with very few takers – whatever the reason might be, outrageously sensational the development most certainly was! 

Expiring crude futures contracts often have a run on them in a climate of depressed demand that we happen to be in but April 20 was something the Oilholic never imagined he would ever blog about. Yet here we are! The very next day – April 21 – the contract did return to positive turf after all the headlines had been written. So is it a 'switch the lights out' moment for the industry? Not quite. Is it an unmitigated disaster for Harris County and wider industry sentiment in North America – most certainly so. 

That's because near-term demand is not looking pretty, and the Oilholic sees no prospect of a return to normalcy at least until the end of July. That too might be contingent upon the global community getting some sort of a handle on the global pandemic. Implications in barrel terms could likely be a Q2 2020 demand slump of at least 20 million barrels per day (bpd) and might well be as much as 30-35 million bpd.

For upcoming and established US exploration and production plays gradually discovering lucrative East Asian markets of light, sweet crude and national headline production levels of 12.75 million bpd – the current situation is a crushing but inevitable blow. 

Chats with Wall Street and City of London forecasters – virtual ones of course (via Skype, WhatsApp, did anyone mention Zoom) – and with several industry contacts from Harris County, Texas to Denver, Colorado suggest come 2021 US production is likely to fall to ~11 million bpd. But a long-term market has been established for competitively priced light, sweet barrels currently available at a rather cheap price provided you can find a place to stack or store the barrels. 

In fact, the lowest spot price the Oilholic has encountered is just south of $2 per barrel as shutdowns and idle rigs become the order of the day. Only problem is storage – which contrary to popular belief, and as verified by satellite imagery – hasn't quite run out US onshore but is on the verge of being leased and spoken for. 

And it is costing dear on a floating basis too, something that is unlikely to change as traders gear up for contango plays! Simple formula - get your hands on crude cargo from anywhere between $2 to $18, ride out the coronavirus downturn, pin hopes on a Q4 2020 to Q1 2021 recovery and make a tidy profit!

Hypothetically, if December is the cut-off point for such bets right now, then WTI December contract is around $29 per barrel while WTI June is trading around $17. That gives one of the widest contango structure of $12 and a 70.6% discount to six-month forward contracts for anyone with hands on US light sweet crude; means to hold on to it; and flog it off six months later on margins not seen since 2009. 

It is doubtful the returns are likely to be of the magnitude raked in by Gunvor in the immediate recovery that followed the 2008-09 financial crisis but they could be substantial. Many on Wall Street are calling it the 'super-contango' but the Oilholic prefers something else. Opportunities and differentials like this do not come along often – so yours truly thinks calling it the 'Last contago in Harris' is way more colourful. That's all for the moment folks! Stay safe! Keep reading, keep it ‘crude’! 

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2020. Photo: View of Downtown Houston, Texas, US © Gaurav Sharma, May 2018.

OPEC+ G20 = 'Crude' potpourri + V-shaped recovery

There have been umpteen developments over the last fortnight in the crude saga of oil producers scrambling to curtail production in light of the unprecedented drop in demand triggered by the coronavirus or Covid-19 outbreak.

That oil prices would have fallen regardless was a given, but the current desperate market situation was largely of Saudi Arabia and Russia's own making following the collapse of OPEC+ on March 6. 

Marking a reversal, frantic talks over the Easter weekend saw Moscow and Riyadh underpin a 9.7 million barrels per day (bpd) production cut, with feverish diplomacy by U.S. President Donald Trump and the promise of 1.5 million bpd in cuts by G20 oil producers serving as an accompaniment. Overall, the crude potpourri smelt better than it actually was. 

For the expected near-term oil demand decline is likely to be two to three times the production cut level. The deal itself doesn't look rock solid. As the Oilholic discussed with Mary-Ann Russon of the BBC, around 2.5 million bpd of cuts have been promised by Russia, an OPEC+ participant with a very poor record of compliance with the OPEC+ framework. 

The Saudis meanwhile would be cutting 2.5 million bpd from an inflated level of 11 million bpd. Prior to OPEC+'s December meeting, their production stood at 9.744 million bpd, which means in actual fact their compromise is closer to 1.25 million bpd on average. 

Yet for all of this, if oil demand is dire, any supply cut is only likely to have a very limited impact. We are flying, consuming and driving less (despite 99c/gallon prices in some US states) - so if we aren't going out that much, it won't matter one bit what OPEC+ does or doesn't. 

The deal is supposed to run from May to July and it won't avert short-term pain. It's come too late to rescue April, and it's too little for May and June. Hopes are pinned on a V-shaped recovery in oil prices come the middle of July. But how steep that 'V' might be is the question, and in the Oilholic's opinion it'll be steeper than where we are. 

As for The Donald, here is this blogger's take in a discussion with Marco Werman on PRI / BBC joint radio production The World. Phenomenal diplomacy it was by the President but more hot air was generated than tangible results. 

Additionally, the Oilholic also discussed various other market permutations, facets and shenanigans plus direction of oil and gas stocks, fuel prices, and several other energy topics with a host of industry colleagues including Richard Hunter of Interactive Investor, Freya Cole of BBC, Juliet Mann of CGTN, Victoria Scholar of IG Markets, Auskar Surbakti of TRT World, Sean Evers of Gulf Intelligence, Garima Gayatri of Energy Dias and scribbled half a dozen Forbes missives in what can only be described as the most manic of all manic fortnights for the oil market.

Final thoughts - WTI still looks like it'll hit mid-to-late-teens and continue to lurk below $20 per barrel  till early summer because dire demands means dire prices! That's about it for the moment folks! Stay safe, keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2020. Photo I: Oilfield in Oman © Shell. Photo II: Gaurav Sharma on the BBC, TRT World and CGTN broadcasts © Broadcasters as mentioned, April 2020. 

A catalogue of ‘crude’ missives on oil market turmoil

In the nine days that have lapsed since yours truly last wrote a blog post, the crude oil market has gone crude and cruder, peppered with barmy ideas, suggestions of strange alliances, tariffs, and of course tweets. For all of that, two things haven't materially changed – crude demand collapse continues as the coronavirus or Covid-19 pandemic spreads, and oversupply in the face of demand destruction is already here.

So here are few of The Oilholic’s missives via Forbes and Rigzone tackling various market slants between March 26-Apr 2:

• With whole countries in lockdown mode, forecasters now reckon a fifth of global crude demand could be wiped out - Forbes, Mar 26, 2020. 
• The Oilholic's thoughts on why a resurrection of OPEC+ would be too little, too late for the oil market - Forbes, Mar 27, 2020.
• Oil futures are in record contango - Forbes, Mar 29,2020. 
• Oil benchmarks ended Q1 2020 around 66% lower and lack of storage space is becoming apparent - Forbes, Mar 31, 2020. 
• US shale explorer Whiting Petroleum becomes the first casualty of the current oil price slump as it files for bankruptcy - Forbes Apr 1, 2020. 
• Moody's announces series of predictable negative outlooks on major oil and gas companies - Forbes, Apr 1, 2020. 
• How Saudi belligerence has pushed VLCC rates to comedic highs - Rigzone, Apr 1, 2020. 
• And finally, how a Donald Trump tweet sent oil futures soaring but the gains are unlikely to last - Forbes, Apr 2, 2020. 

And that's about it for the moment folks! Stay safe, keep reading, keep it 'crude'!

To follow The Oilholic on Twitter click here.

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2020. 

Coronavirus lockdowns & crude oversupply

What a week it has been for humankind in general, let alone the commodities and equities market. Since the Oilholic arrived back to London from Houston on March 14, in a matter of days whole towns, cities, metropolitan areas, regions and countries have gone into lockdown mode around the world, with the coronavirus or Covid-19 having spread to over 100 countries.

After China, where the outbreak originated at the start of the year, now Iran, Italy, Spain and South Korea are in its grip. Heightened alarm about the spread of the coronavirus has seen European Union nations, Canada and the US close borders. Whole airlines are grounded, restaurants, pubs, bars and shops are shut, and workers in many sectors in several nations have been advised to work from home with restrictions slapped on venturing out.

Under similar circumstances and restrictions imposed in London (effective March 23) comes this missive from the Oilholic's living room. The last few weeks have alternated between how much of a demand slump the coronavirus would cause to what impact the collapse of OPEC+ would have over the near-term.

Such conjecture misses the wider point. Events have overtaken OPEC+ and are now largely beyond its control, and what we are witnessing is not just a demand slump but a total near-term collapse. Most oil demand forecasters are now predicting a 2020 demand shrinkage of around 155,000 barrels per day (bpd) instead of demand growth. Under the circumstances, that might be too optimistic.

From where the Oilholic sits, we could see a shrinkage of 250,000 bpd instead of a projected demand growth of 1.2 million bpd prior to the outbreak. Consider this - of the big five crude importers, China, which imports on average a whopping 14 million bpd, has had a lousy first quarter, and is likely to have disappointing or muted second and third quarters. Japan and South Korea are likely to import less, as will the US.

India, the one economy many were pinning their hopes, as a demand driver for 2020 prior to the coronavirus outbreak has also just gone into a lockdown effective Tuesday (March 24) for 21 days.

The country imports an average of 5 million bpd. So in three weeks alone, India won't be needing around ~ 100 million barrels with the negative impact spread over parts of the first and second quarters. Away from the big five, OECD demand remains as low as ever and is likely to head lower on temporary lockdowns from Poland to Australia.

And in the face of this demand crisis, is the issue of oversupply that has arisen in the wake of the collapse of the OPEC+ with Saudi Arabia, Russia and other OPEC and non-OPEC producers vowing to pump more. For now, after posting declines of 20-30% week-over-week, Brent and WTI futures have settled in the $20-30 range following US stimulus measures to combat the coronavirus.

That may well prove to be a temporary reprieve after the extent of the supply glut, somewhere in the region of 10 million bpd in unwanted crude oil, becomes clearer. As for what it means for oil and gas companies large and small - here is the Oilholic's take via Forbes, as players bunker down for $20 oil prices and prepare to write of 2020. That's all for the moment folks! Stay safe! Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2020. Photo © Royal Dutch Shell, Oman.

On Tankers, Travel Bans & Turbulence

The Oilholic is about to wrap up a week in Houston, Texas, gauging the oil market mood and related industry matters in the age of the coronavirus and the collapse of OPEC+, penning his thoughts by the banks of a rather calm Buffalo Bayou. 

Following on from the carnage of an oil price war, in the time yours truly has been in America's oil and gas capital, US President Donald Trump has announced a travel ban from Europe to the US; several countries are in lock-down mode or restricting access to foreigners; hoteliers, airliners, restaurateurs are all gearing up for a massive hit and with general gloom lurking in the air along with the virus - the equity and oil markets are down. 

In fact, in this blogger's latest weekly oil price assessment, Brent and WTI front month contracts closed down a massive 25.23% and 23.14% on today (Friday, March 13) on the Friday before (March 6). In over ten years of running this blog, that is the biggest weekly drop the Oilholic has logged and given that weekly assessments are supposed to wipe out daily volatility; the figures are telling. 

And the contango plays have begun yet again coming to the aid of a beleaguered oil shipping industry that must surely think Christmas has come early. More so because Saudi Aramco's bid to flood the market with its crude has sent VLCC tanker rates rising further, in some cases by as much as 678% when it comes to the lucrative Middle East to Asia maritime routes, as yours truly noted in his latest Forbes missive. 

Many in Houston expect an imminent prompt price decline to $25 per barrel, with limited upside as Russia and Saudi Arabia continue their oil price and market share war at a time of lacklustre demand. General consensus is that when oil hits $20, OPEC will come its senses. However, it doesn't look like that right now with other Gulf producers including the United Arab Emirates and Kuwait upping production in step with Saudi Arabia. 

And while Saudi discounts are the talk of H-Town trading circles, Trump's plans to purchase "American made crude-oil" for the US Strategic Petroleum Reserve (SPR) is providing yet more chatter. The SPR holds 713.5 million barrels at four primary oil storage sites. 

According to survey data, that level is currently at 635 million. So even if Trump goes for the maximum effect, the reserve can take another 78.5 million. The "American made" caveat means it could take that much primarily US light crude spread over the next 100-120 days from next week. 

While such a volume is not negligible, how much of a difference it will make is anyone's guess. Supply side is as complicated as ever and so is the demand side until the full impact of the virus is clearer. This turbulence will last a while and might rock most of 2020 at the very least in the opinion of many. And on that worrying note, its time for the flight home to London! Q1 has been a write-off; let's see what Q2 brings, stay strong, stay safe.

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2020. Photo: Buffalo Bayou river, Houston, US © Gaurav Sharma, Friday March 13, 2020