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Old 20th April 2020, 23:19   #1
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Default American crude prices have crashed 90%! Now trading at $2 - 3 per barrel

Gents, something unusual happened - American crude prices have crashed 90% and is now trading at $2 or $3 per barrel.

American crude prices have crashed 90%! Now trading at  - 3 per barrel-crude.jpg

However, in the screenshot, note that Brent crude is still trading at $26. India pays Brent prices to the Arabs. Now let me explain what happened here -

- American crude, also called WTI Crude is shale oil.
- Canadian crude is from oil sands, and this always trades at a small discount to WTI crude because refining margins are not that great.
- Brent crude price is oil produced in Europe/Arab countries, close to coastline.

Because of coronavirus/lockdown and Saudi/Russia tiff over marketshare, there was global demand destruction and excess crude production at the same time. India's fuel consumption is down 60% for example. The reserves of all countries (including India's) is full of crude oil. So oil producers are hiring oil tankers to store crude oil.

But now, all the oil tankers and storage tankers are full! Canadian oil momentarily went into negative zone. That is, crude oil producers need to PAY oil traders/refiners to lift crude from the source . That's because oil producers cannot dump the crude oil already produced into a field or a river. So the poor Canadians are paying traders to lift the crude. Thanks to lockdown in USA and full storage, there is not much demand for American crude either - that's why American crude prices crashed today.

However, over the next few days, the oil storage is expected to be freed up and American crude price is likely to go up soon. That is reflected in WTI crude futures prices (in Rupees per barrel) for May/June/Jul/Aug/Sept month. In layman's terms, higher futures prices indicates that the markets expect American crude prices to rise significantly. The temporariness of current American crude price is also reflected in current brent prices (which is significantly higher than American crude).

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News source:
https://www.cnbc.com/2020/04/20/oil-...ts-demand.html

UPDATED (12 PM Midnight, 21st Apr 2020): American crude price is negative now.

Last edited by SmartCat : 21st April 2020 at 00:01.
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Old 21st April 2020, 00:00   #2
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Default Re: Effects of Coronavirus on the global economy

@smartcat WTI crude is minus $7 now. Its going down like there's no tomorrow. Is there any way Indian investors can profit off this (and the inevitable rise that'll happen next)?
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Old 21st April 2020, 00:05   #3
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Default Re: Effects of Coronavirus on the global economy

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Originally Posted by digitalnirvana View Post
@smartcat WTI crude is minus $7 now. Its going down like there's no tomorrow. Is there any way Indian investors can profit off this (and the inevitable rise that'll happen next)?
It finally closed at -$35 per barrel.

Sitting at home, you can do nothing. But Americans can theoretically buy a few thousand barrels of crude and get paid for it. Sure, storage is a problem - only option is to store it in buckets and water tanks. And then sell the crude later at a profit

The world financial and oil markets are broken. This is not normal.

Last edited by SmartCat : 21st April 2020 at 00:07.
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Old 21st April 2020, 00:39   #4
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Default Re: Effects of Coronavirus on the global economy

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Originally Posted by SmartCat View Post
It finally closed at -$35 per barrel.

Sitting at home, you can do nothing. But Americans can theoretically buy a few thousand barrels of crude and get paid for it. Sure, storage is a problem - only option is to store it in buckets and water tanks. And then sell the crude later at a profit

The world financial and oil markets are broken. This is not normal.
World financial markets did their learning from 2008 sub-prime induced crises quite well and so have managed better until now. Lets see how it unfolds in comimg weeks/months.
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Old 21st April 2020, 01:20   #5
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Default Re: Effects of Coronavirus on the global economy

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Originally Posted by SmartCat View Post
This is not normal.
When the lockdown is lifted, in a matter of weeks, the demand will be back to . Most of the folks around the world are either sick or afraid of being sick. When this tides over, say in a couple of quarters, the situation will start returning to normalcy.
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Old 21st April 2020, 01:46   #6
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Default Re: Effects of Coronavirus on the global economy

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Originally Posted by SmartCat View Post
Gents, something unusual happened - American crude prices have crashed 90% and is now trading at $2 or $3 per barrel.
To just add to it Nymex WTI is physical delivery and was expiring on Apr 21st. The Cash settled ICE Brent with an expiry of Apr 30 still trades at $25.

Last edited by Gannu_1 : 21st April 2020 at 12:34. Reason: Trimming quoted post.
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Old 21st April 2020, 09:35   #7
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Default Re: Effects of Coronavirus on the global economy

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Originally Posted by SmartCat View Post
Gents, something unusual happened - American crude prices have crashed 90% and is now trading at $2 or $3 per barrel.

Because of coronavirus/lockdown and Saudi/Russia tiff over marketshare, there was global demand destruction and excess crude production at the same time. India's fuel consumption is down 60% for example. The reserves of all countries ----
That is, crude oil producers need to PAY oil traders/refiners to lift crude from the source . That's because oil producers cannot dump the crude oil already produced into a field or a river.
Hi Smartcat,
The oil storage reservoirs would not have filled up overnight. And it is everyone's knowledge that the demand is going to be bleak for sometime. So, why they did not stop production much in advance? Any underlying reasons?
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Old 21st April 2020, 09:46   #8
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Default Re: Effects of Coronavirus on the global economy

^. Production of crude happens in the most unforgiving circumstances and Russia has one of the most unforgiving environments. The main reason for the conflict between Saudi and Russia over cutting the production volumes was because of the sustainability of Russian crude operations required a minimum volume to be pumped out and Saudi was asking to cut production to volumes lesser than that.
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Old 21st April 2020, 10:00   #9
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Default Re: U.S. Oil Priced At Less Than $0 A Barrel (priced at $ -13.10 per barrel).

ELI5 :

WTI oil is American origin whereas BRENT is from ME, Russia and Europe.
The oil price that has gome negative is WTI but only for the month of May 2020. The price for June for both WTI and BRENT is higher.
The reason for WTI going negative is because there is a low demand these days resulting in an oil glut and therefore the warehouses of buyers are full.
Since the Futures contract for May 2020 was not "net settlled" before the notice date, it is the reponsibility of the buyers to take physical delivery but now they don't have space to store the oil.
Therefore they are actually paying some other parties to take this consignment off their hands. That is why the WTI oil has a negative price.
This should lead to a fall in production because otherwise oil producers will have to first pay for drilling the oil and then pay someone to take delivery of oil.


For those unaware, futures contracts are essentially pre-ordering something, hoping it sells out, and then scalping it on eBay, but on a far larger scale. You have a contract agreeing that you'll buy something at a certain price (the settlement price) at a certain date (the settlement date). Let's say that you make orange juice, and I want to buy orange juice. I offer to pay you $3 for a gallon of orange juice that I'll pick up next Saturday. When Saturday comes by and I pick up the orange juice, if the price goes up to $5 a gallon, you still have to honor our contract and give it to me. I then can sell it for a $2 profit. If the price had gone down to $2 a gallon, I'd be left with a $1 loss.
(If you've seen Trading Places and understand what the bad guys' scheme was, feel free to skip this part.)

If you've seen Trading Places, the bad guys do most of their trading in commodity futures contracts. Their plan is to corner the market (i.e., hoarding enough of a good to the point where they can sell it for however much they please) in orange juice futures. They steal a US Department of Agriculture report about that year's orange crops, thus allowing them to plan their strategy before everyone else knows. However, Dan Akroyd & Eddie Murphy give them a fake report saying that it was a bad harvest; this makes the bad guys think that the price will go up, so they plan to buy up a bunch of futures before the report is announced. If the price goes up as they hoped, they'll be guaranteed to have the lion's share of the country's orange juice for cheap. So at the start of the trading day, they submit an order that says "use everything we've got to buy as many orange juice futures as possible." A bunch of other people go "They're buying orange juice futures, they must know something I don't" and start buying orange juice futures too. This spike in demand causes the price of futures to go up; the bad guys don't mind, because they know they'll still make shitloads of money from it.
However, the actual USDA report is that the harvest was normal, and everyone starts panicking; they can't undo the sales, so they're stuck with futures they paid more for than it's actually worth. Everyone wants to sell, and the collapsing demand drives the price down. However, Akroyd & Murphy spent the entire morning short-selling orange juice futures.* So now in order to fulfill their short sales, they start buying everyone's orange juice futures for cheap... except for the bad guys. At the end of the day, the bad guys are on the hook for hundreds of millions of dollars while Akroyd & Murphy become insanely wealthy from their trading.
*Short-selling is essentially the inverse of regular trading. In regular trading, you borrow someone else's money, buy a stock/bond/future/etc. when it's low, sell it when it's high, pay back the loaned money, and pocket the difference. To make a profit, you hope that the asset goes up in value. In short-selling, you borrow someone else's stock, sell it when it's high, buy it when it's low, pay back the loaned stock, and pocket the difference. To make a profit, you hope that the asset goes down in value.
What's happening now is what happened in Trading Places when the real report comes out: people realized that they overpaid for their futures and are selling to try and recoup some of their losses. There's barely any demand for oil right now, there's little hope that there'll be more demand for oil in May, and there's very little storage space left already. Low demand + high supply = low prices. A few days ago, the settlement price for a barrel of oil for futures contracts with May settlement dates was locked at ~$18 a barrel. People expect it to be way lower than $18 next month. So, what they're doing is trying to sell off their futures contracts. It's going negative because they're literally paying you to take it off their hands if you have room for it. Although they know it'll be a loss, they figure it's less of a loss than holding onto a bunch of worthless oil that they can't store.


Source : Reddit Link
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Old 21st April 2020, 10:19   #10
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Default Re: Effects of Coronavirus on the global economy

Quote:
Originally Posted by ZedMae View Post
The oil storage reservoirs would not have filled up overnight. And it is everyone's knowledge that the demand is going to be bleak for sometime. So, why they did not stop production much in advance? Any underlying reasons?
1) Although it was common knowledge that oil storage was full, there was positive news that Saudi/Russia/US agreed to a large production cut. Plus, there was talk about flattening of covid curve in USA.

2) Small to medium sized oil producers in USA have lots of debt payments to make. They need some cash flows to take care of these payments, and did not stop production significantly

3) OPEC oil production is controlled by the body that keeps an eye on supply and demand. Russian oil production is primarily driven by the State. But American oil production is not "controlled" by any entity. It looks like not many oil producers cut down production, probably hoping that future will be better.

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Originally Posted by rohitoasis View Post
The main reason for the conflict between Saudi and Russia over cutting the production volumes was because of the sustainability of Russian crude operations required a minimum volume to be pumped out and Saudi was asking to cut production to volumes lesser than that.
Also, Russia did not like the fact that OPEC and Russia were cutting production, but not USA. This resulted in USA gaining marketshare at the expense of OPEC countries and Russia.

Saudi and OPEC nations have one of the lowest cost of production (around $6 per barrel). By cranking up production, they hope to bring USA to the negotiation table. And it worked quite well actually -

U.S., Saudi Arabia, Russia Lead Pact for Record Cuts in Oil Output
https://www.wsj.com/articles/opec-al...al-11586695794

Last edited by SmartCat : 21st April 2020 at 10:29.
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Old 21st April 2020, 12:02   #11
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Default Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel

Thanks for sharing, SmartCat! Moving this interesting discussion to a new thread. Added to our news section too .
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Old 21st April 2020, 12:39   #12
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Default Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel

Talks of demand getting rejuvenated and restored at past glory is also not very helpful.
When the economic activity is halted (or for than matter even simple mechanical stuff) stops rotating, a lot of cleaning is needed before restart. When restart happens, every thing does not resume from where they left. A lot of people will have lost incomes, consumption will not only be curtained, it will also be transformed. If the world wide economic activity does not pick pace by say 15-May we will see a lot of shocking things happening.

So crude is in for a very crude shock.
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Old 21st April 2020, 13:12   #13
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Default Re: Effects of Coronavirus on the global economy

I work for a petrochemical giant. From the other side of the table, We are directly affected by oil prices.

Quote:
Originally Posted by SmartCat View Post
Russia did not like the fact that OPEC and Russia were cutting production, but not USA. This resulted in USA gaining marketshare at the expense of OPEC countries and Russia.
There isn't enough volume of oil production in USA perse and also USA and UK have a significant share of oil produced in the Gulf. It is the Russia's opportunism that has fueled the oil war. When OPEC (Gulf and South American countries) decides to cut volumes, so there is a collective good price for everyone, Russia continued to exploit the high prices. OPEC warned Russia multiple times and they didn't budge. This was bound to happen sooner than later and here they are on their knees.

Last edited by Thermodynamics : 21st April 2020 at 13:14.
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Old 21st April 2020, 13:20   #14
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Default Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel

When countries all around the world locked down due to Coronavirus, reducing air travel and road traffic drastically, wasn't this expected?

I don't follow commodities market, but those who do should have foreseen this, no?
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Old 21st April 2020, 13:25   #15
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This was bound to happen sooner than later and here they are on their knees.
Looks like the Russians are low cost producers too - so they will survive (since Brent is at $26).

American crude prices have crashed 90%! Now trading at  - 3 per barrel-barrelcost.jpg

Note:

- Green bar is pure production cost
- Grey bar is production cost + transport cost (to nearest port) + govt taxes + avg depreciation cost

Data from WSJ 2016 article:
http://graphics.wsj.com/oil-barrel-breakdown/

Last edited by SmartCat : 21st April 2020 at 13:33.
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