Black Gold (Texas tea)

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The price of oil dropped below zero for the first time ever yesterday, with futures for U.S. crude delivered in May wrapping up at negative $37.63 per barrel. In practical terms, this means that anybody who is supposed to receive a shipment of American crude but doesn’t want it will have to pay somebody else to take it.

The oil glut will be with the world for some time. And in places like Russia, it portends an economic depression in 2020 that will continue through 2021. The glut means that oil is essentially worthless if the law of supply and demand holds. You know that countries such as Russia and Venezuela will turn the valve to the right as soon as they can. Mexico’s economy is slightly more robust, but this will throw them into a depression – more serious than a recession. For the US, there are roughly one million highly paid workers in the oil business who won’t be working outside of refining and distribution. The trickle down of that income loss to the nation (the metric is 14x the base income plus the overhead expenses associated with the oil business) is staggering.

It happened in the US in the 1980’s when the bottom dropped out of the oil market. Drilling rigs were abandoned and offered as scrap to anyone who wanted the parts, free. Colorado, Texas, Oklahoma, Alberta, and the Gulf are about to take a serious thumping.

Yes, there is unemployment, but a million Americans won’t be buying new cars, or appliances, or spending. President Trump suspended foreign immigration while the US is experiencing this unemployment problem. But the current number of 23 million will get worse.

We are literally running out of places to put all of the extra oil we’re not using, because people have stopped driving, flying, or living any semblance of normal life while the country descends into a state of coronavirus-induced catatonia.

“The historic low price reflects uncertainty about what buyers would even do with a barrel of crude in the near term. Refineries, storage facilities, pipelines and even ocean tankers have filled up rapidly since billions of people around the world began sheltering in place to slow the spread of the deadly coronavirus.” – Wall Street Journal

This is happening despite the deal Donald Trump helped broker between Russia and Saudi Arabia to cut production and stabilize prices.

Buyers are still willing to pay positive sums of money for crude delivered later in the year. Contracts for June closed the day above $20 a barrel, which suggests that traders expect the current glut to ease up a bit, either due to further production cuts or because they think the economy will have recovered ever so slightly by then. They just really don’t want to be responsible for dealing with a bunch of hydrocarbons right now. So the commodity’s price is higher in the future than the present.

The storage problem also appears to be worse in the United States.  Investors are worried that storage is reaching capacity in Cushing, Oklahoma, the domestic industry’s key transit hub. Brent crude, the international benchmark variety that mostly gets shipped out on tankers, is still trading at $25.70, presumably because it has a wider market and there are just more places to park it.

To make matters worse, a group of oil tankers that left Saudi Arabia before the country agreed to cut production is currently heading toward the U.S. That oil will further strain storage capacity unless another country buys them before they reach the U.S.

“It’s like some movie from the 1980s where the U.S. president and the Soviet premier come to an agreement” to halt a nuclear war, “[but] one plane missed the call back.

And these million out-of-work oil and oil-related workers…what will happen to them? They’ll find other work, not in the oil field if the problem extends long enough.

What will happen when it’s time to start drilling for oil again, when the experts have departed and found new lives?

26 thoughts on “Black Gold (Texas tea)

      1. I spoke to a friend in Scotland today on the phone and he says that the price of petrol hasn’t budged, and that the North Sea Oil Fields are a mess. The Israelis bought up a chunk of it recently.

  1. This is a temporary condition. The demand for oil/fuel has diminished but not gone away. Over the next few weeks companies that were marginal, not having lots of assets will fold. The number of producers will diminish. Eventually the amount of available oil will drop to the point where it’s profitable to resume drilling and pumping. Might be a few weeks or a few months but it will happen.
    However once demand resumes prices will rise precipitously as a lot of smaller producers will no longer be supplying the market. Fuel prices will be low….for a while. But they WILL climb back up again eventually. And they will NEVER reach zero even if the price for oil is a negative. .Gov taxes per gallon will insure fuel still costs money even if nothing else does.

    1. Yes, it’s temporary, but the industry, particularly the drilling and exploration portion of it will have a long vacation because foreign producers will be able to turn the valve long before it’s profitable for domestic production to resume. And yes, the price at the pump reflects a lot of excise taxes in most locations.

      My observation has more to do with the geopolitical landscape and domestic unemployment in the short (year/18 months) term, which will be problematic to the nation in all respects well beyond the era where we’re heavily focused on the Chinese Plague.

  2. As an additional comment to the blog post, Russia’s break even point for oil, considering that it supplies Asia with a pipeline is much lower than Saudi oil (their competitor), which has to come by tanker/ship. The price drop of West Texas Intermediate (WTI) doesn’t have a direct impact on their pricing, but even that notwithstanding, Russia dropped oil production by 20% and may decrease from that number.

  3. The good news is, it’ll hurt (many of) our enemies more than it’ll hurt us.

    The bad news is it’ll probably help the PRC. Hopefully Winnie and it’s consequences will turn out to have hurt them more than this helps.

    -Kle.

  4. Burning down the house.

    When God lifts the veil it becomes obvious as to what is occurring, and it is a very ugly truth. Yet, as to be expected, even Christian family and friends we know have bought the propaganda, hook , line, and sinker.

    “Go buy TP!” [Huh?]
    “Stay inside!” [because fresh air is bad for you??]
    “Wear [useless] masks when going out or get fined!” {Bring it on I say]

    So these people do, like mind-numbed robots. And the elites are rubbing their collective hands because they simply cannot believe their good fortune of this perfect ruinous storm with COVID.

    The President needs our continued prayers of protection.

      1. No kidding…I suppose the tyrannical subversives got a twofer.

        I continually ask myself: “Why THIS virus?” The answer lies in what the grifter’s do with an opportunity.

        God bless.

        1. No matter what the incident, the political class will twist it to remove liberty. Even a cloudy day is cited as proof positive of global warming. A pandemic – well that’s a mutli-trillion dollar scam.

          1. Among other video’s out there (one must be careful with these things but a few are truth), just watched “Out of Shadows”…whole new perspective for me as to what is operating among societal elites. No more suspecting, it’s worse than I thought. In short: Evil-doing. The exact reason Cory Feldman now needs bodyguards since trying to publish his documentary, people who expose these devil worshipers end up dead.

            It is also why when Trump announced the med cocktail as promising the media immediately denounced the move and drugs. Marching orders had been given.

          2. They thought they had it fixed with Hillary. They had an FBI “insurance policy”. Then it didn’t go their way. Now, they’re at it again.

  5. My mom lived and brokered real estate near Shreveport in the 80’s.
    (I think OldNFO and I determined our folk may have known each other.)
    I remember that recession and it’s effect on the oil economy there.
    Very bad.
    And as you said, the talent found other things to do.
    Heck, I’m wondering how rusty I’m getting only a month out of work.

    1. This oil recession will hurt us because everyone will pump under our price point. As I wrote, I don’t seeing things even begin to come back with the oil business for 12 months on the short end. There is just too much oil out there, too much stored, and too many people welling to sell in the $20’s.

  6. Yep, those were sad days Ed. Lot of folks went broke and were scrabbling for ANY job. 12 months may not be long enough, LL. This will put the WolfCreek project on hold until ??? They need >$40/bbl to be profitable. And there will be a serious talent drain in the patch. For some folks, this is the final time they will take an oilfield job.

    1. Oilfield work is dirty, the hours are long and it’s just hard. Not everyone is cut out to do it. The pay is good, but as with all things, the supply and demand monster is not under your control.

  7. In a conversation at the dog park this morning, a couple in their late 40’s told me they just lost their oilfield service jobs. They don’t expect to have them back anytime soon. They are hoping that enough manufacturing jobs will come back so they can continue to work until retirement age. They are just one of many facing some brutal choices.

    1. It’s a horrible situation. Manufacturing may come back in 2021 and oil may come back in 2022, but it’s going to be a long hard road. You’ll be busier than ever. I know it’s not a gleeful job, but at least it’s a job.

  8. The huge hit the Midwest took in the 1980’s is one of the main reasons I moved to Kalifornia.

    I simply couldn’t find any decent paying jobs I felt comfortable doing. All the “good” jobs were filled, and since I didn’t have a family to support, I pulled up stakes and followed Horace Greeley’s advice to “Go West”.

    Then I learned about the cyclic nature of the Aerospace Industry…..

  9. Carnage on the streets of Houston and everywhere else. I could see a few churchmen’s firms go under… But hopefully not.

    In brighter news, 45’s saying Satan’s Vatican should give back its 9 mill loan. Good, well said Mr. President.

    1. Yes, it was nice to see the president stand firm with regard to Harvard. Why on Earth would they get $9 billion?

      I’ve spoken to friends in the oil business. One called me on his way home from Odessa and said that he was going to take three months off. May or may not go back to work for Shell. A lot of people will do a lot of adjusting primarily because of the Communist Chinese Plague.

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