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Sheen on the Oil Slick Getting Darker

Oil sheen from the Exxon Valdez oil spill.

Last week, I wrote that the day would come soon when oil prices would take another nasty dive because there is nowhere left to store oil, causing the spot price for immediately delivery to dive toward the zero bound. This week we see how close that day is as oil continues to be oversupplied by about a million barrels a day.

Reasoning simple: When all ships, tank cars, tank trucks and tank farms are finally full, immediate delivery of oil will be nothing but a liability. That kind of delivery is called “an oil spill” because all you can do is pump it onto the ground or into the sea … or start filling swimming pools, as one oil industry analyst said is the next step. Production will have to slow to whatever the rate of consumption is, as it will become a situation of one tank used before one tank is bought.

 

Oil practically spills over in Rotterdam

 

The Wall Street Journal reported on Monday that oil tankers are backing up at the world’s largest oil seaport. In fact, buyers and sellers of oil are increasingly sending tankers on longer voyages just to avoid a pile-up of tankers at several ports.

 

Up to 50 oil tankers are waiting to unload cargo in the port of Rotterdam, the highest number since 2009 and another sign that, amid a glut, crude is struggling to find a home. (WSJ)

 

There is that magic number that appears in almost all economic news this year — “since 2009” or “since 2008,” in other words “since the worst of the Great Recession” or “since the start of the Great recession.”

Storage in Rotterdam is nearing its limits. Ships are bobbling around out at sea waiting to find a port where they can unload their crude. The world’s largest oil storage company reports that its storage tank capacity in the Netherlands is now at 96% full.

 

“This is a clear sign of the oversupply filling up storage to the brim,” Gerrit Zambo, an oil trader at Bayerische Landesbank in Munich, said by phone. “People are preferring to store oil rather than cut production. These are bearish signs.” (Bloomberg)

 

The situation in Rotterdam is exactly mirrored in the United States’ largest oil hub, which is in Cushing, Oklahoma.

 

“In Cushing and probably Rotterdam storage is filling up very quickly,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich, Switzerland. “In China, given high oil imports, there are too many ships and the infrastructure seems not be able to handle that.”

 

The result of the glut is that future prices are higher for oil than prices for immediate delivery because fewer and fewer buyers have a place to put it right now or any need right now. The final leg of this journey before prices plunge is storage out at sea in tankers that drift for months and in tank cars and tank trailers parked on side spurs and in trucking yards.

With the intentional choice of longer routes, we’re already effectively edging in that direction. Some are saying it may be a good time to be a vessel owner because you can get paid just to sit and float. The last time that approach to managing supply happened was … you guessed it … in 2008 and 2009.

Once the tanks of this world are effectively 100% full, which shouldn’t be more than a month or two, a hole will bust through the floor in the price of oil, and we’ll see an oil-industry bath in black slime.

 


Shale Boom, Shale Bust: The Myth of Saudi America  In 2014, something went terribly wrong with this rosy scenario of “Saudi America.” An unexpected collapse in the price of oil is bankrupting the oil patch, destroying jobs and threatening plans for a renewable energy future.


 

War is good news for the price of oil, for oil producers and oil bankers

 

This bad news for the price of oil hit at the same time that good news for the price of oil hit this week, and the oil market and US stock market decided to focus on the good. The price of West Texas Intermediate rose to an intraday high of $34.76 per barrel, and US stocks shot up to match. The good news for the price of oil was that war took a significant oil pipeline out of production in Iraq. While that’s temporary, hopes might have risen that the increasing drum beats of war in the Middle East will mean a lot of supply lines wind up getting cut or wells wind up getting bombed.

Middle East war, of course, would be a total game changer in the oil price wars. I wouldn’t be surprised if some oil barons someplace are not just banking on it but actively laying out their war plans. (I don’t know of any such conspiracies, but it wouldn’t be the first time oil barons used war to boost the price of oil. Usually it is by increasing demand, but in this case it would boost prices by creating a drop in supply of crude.) What’s bad for one person’s crude sales, such as carpet-bombing their oil wells and sabotaging their pipes, is good for another’s whose wells are, say, in the Midwestern US. Not that anybody would do such a thing.

War is the wildcard here; but, barring destruction of oil wells or oil infrastructure by war, things are looking dark for the price of crude. (Good for the consumer of gas and heating oil, but bad for the Midwestern and Canadian oil producers as well as those up around Scotland and many other areas. In the US Midwestern oil and gas shale was almost the entire driving force in job creation coming out of the first dip the Great Recession. (The second dip — the Epocalypse — is just now forming. It’s the same recession because its all from the same cause and was just artificially lifted by unsustainable money-printing in the middle.)

 

Good news was bad news in the Saudi-Russia oil summit

 

As reported in my last article, the real news from the meeting between Russia and Saudi Arabia was that both nations agreed NOT to cut oil production, regardless of how bad the negative impact becomes on the price of oil. Saudi Arabia stated specifically that its intention is to maintain market share by making sure production keeps happening at its current rate out of Saudi Arabia until other players are forced out of business. That’s what they actually said.

Bear in mind, too, that the agreement between Russia and Saudi Arabia was not an agreement by the rest of OPEC. The energy minister of the United Arab Emirates said crude producers should freeze production, making it clear there is no OPEC-wide agreement to freeze, and Saudi Arabia and Russia said they would only freeze so long as others did the same.

 

One of the world’s large oil companies takes a hard dive

 

Mexico’s largest, state-owned company, Petroleos Mexicanos also known as Pemex, announced not only its 13th consecutive quarterly loss amounting to $9.3 billion, 44% bigger than the previous year, as revenue tumbled by 28% to $15.8 billion, but also a gargantuan $32 billion annual loss and at the same time announced it would slash capex spending to preserve cash and optionality for a future which suddenly looks very bleak. (ZeroHedge)

 

As a result of crashing oil prices, Pemex is cutting way back on its project development, and that’s a state-owned company, so government subsidized if need be. US companies are only subsidized through tax structures. Pemex is…

 

…facing short-term financial difficulties, prompting some to wonder just what skeleton will come out of the closet if the oil price remains as low as it has been… But the scariest news not only for Mexico’s largest company, but for the energy sector in general, was Pemex’ announcement that it was slashing its oil price forecast by 50% from $50 to $25/bbl…

 

So, the struggling oil behemoth, which had hugely overestimated prices is now slashing its forecast down to my territory, as I say $25, and for a short time perhaps a dive below $20 when we hit those days where production hasn’t slowed and nearly all tanks are full — barring any turn-around from a strategic oil war as those guys never let me know what they’re scheming.

 

And a wrap-up on the stock market and why I care at all about the fall in oil prices

 

While January was the worst in the history of the stock market by many measures, February closed as a mixed month. The Dow posted it’s first monthly gain since last November, but the S&P 500 and the Nasdaq posted their third straight monthly loss, and for once it wasn’t the first three-month decline since 2009. It was just the first since 2011.

Low oil prices are good for the consumer, and for that I am personally glad, even though prices of fuel are for some reason stuck high in the northwestern US, in spite of the huge number of refineries in this part of the world. (Must be some collusion going on to be this much higher for so many months than other parts to the nation that have fewer refineries.) Abnormally low prices, however, do mean failing junk bonds, possible bank troubles, declining energy stocks, problems for hedge funds and investment insurers, and job and housing losses in the areas that were creating the sense of recovery.

So, while I couldn’t care a fig about whether or not oil companies and banks are fat and happy for their own sake, there is no question the oil glut is contributing to the stock market’s troubles in the US and to the recession in Canada. It is, however, one of only many negative forces acting upon all economies of the world, which are collapsing due to their own deep and persistent structural flaws and the inability of politicians to see past their own faces or outside of their very limited ways of thinking.

It is merely a question of which forces are going to lean too hard against the crumbling structures of the old dinosaur economies. Right now it is the specific gravity of oil that is caving them in.

 

More reading on oil wars and oil price wars:

  • The reason oil prices are low is because the customer-end users are broke.

    Almost a decade (longer in Japan) of extraordinary monetary policies has diverted credit from customers to firms including oil drillers. Pushing up benchmark prices is pointless as customers cannot meet them. Drillers are stranded; the entire oil industry is insolvent.

    In this instance, war is useless to raise prices as shortage do not make customers richer.

    What is occurring is credit is being stripped out of the oil markets. What must pay for oil is actual remunerative use rather than access to loans. Since remunerative use is about 5% of consumption the price has a way to decline.

    We use oil for entertainment purposes there is no return to it. Now with output peak in the rear view mirror, the folly of the enterprise reveals itself to those who matter most = borrowers.

  • jakartaman

    I am thinking that what will crash the economies of the world will have to be a big non economic event. Why – because the bankmisters and that crowd have been propping up the economies for years on smoke and mirrors – They will continue. What is beyond their control is terrorism, war, natural disaster etc.
    If I was a betting man – I would lay odds on a bunch of very nasty coordinated terrorist attacks across the west utilizing chemicals/biologic and or dirty bombs. Also lets not rule out EMP’s

    • The odds of those kinds of “black swan” events are clearly rising, too. With all the immigrants from Syria pouring into Europe and full admission by European leaders that they cannot possible screen them all, why would anyone think for a moment that terrorists are too dumb or lazy to seize that opportunity? With more people streaming across the Mexican border into the US and with ISIS training camps known to be in Mexico near the boarder, why would we think we have kept them all out when we have tens of thousands of children who made it across without parents and couldn’t even manage to keep a child out?

      It’s insane. With Iran keeping the right to continue nuclear refining and with North Korea having exercised that right for years, it becomes hard to believe that neither of those nations, which flaunt their hatred for the West in general and especially for the US will ever succeed in getting something nuclear to the US through the hands of terrorists.

      However, I think the banksters have also far exceeded their capacity to do anything to prevent an economic avalanche. They are not long in the tooth or completely toothless. They may try, but it will have, at best, very little effect. More than likely, we’ll see, as we do in Europe and Japan, that they’ve reached appoint where their more potent medicine backfires and starts to kill the patient.

      –David

      • James Clander

        ‘—-With Iran keeping the right to continue nuclear refining bla bla ”

        Iran hasn’t invaded & destroyed & killed millions in the past 10 years alone like the rotten to the core USA has. Israel is nuclear armed to the teeth – but that’s OK ? So pick on the aggressors like the USA who started the whole mess in Syria in the first place.

        • Hi James, Welcome to the site. I do pick on the USA when it comes to Ukraine. With Syria, Assad is horrible, but I have no desire to see us in a war to overthrow him, any more than I wanted to see us overthrow Iraq. But your out to lunch on Iran simply by choosing a convenient schedule of 10 years that puts their worst atrocities off the plate. Iran has not only killed hundreds of thousands of people, it remains an overt sponsor of terror in Israel and of Hezbollah in Lebanon, which is also dedicated to the destruction of Israel. I’m certainly not going to give Iran a free pass with all the evil it has done and is doing in the world just because the US also does great evil. I’m against evil no matter who does it, and I am certain that the Iran that openly sponsors and advocates terror against Israel would love to have a nuclear bomb with Israel’s name on it. They just put out a public offer of money last week to terrorists who will strap on bombs in Israel. All nations, including Israel, have plenty of wickedly spilled blood on their hands, but that doesn’t mean we accept a foolish deal with one just because of something another did or even because of something we did.

          I was opposed to Bush going into Iraq to find weapons of mass destruction that I was pretty sure were not there based on Colon Powells own presentation in the UN. Seemed completely trumped up to me. I was not opposed to going into Afghanistan because I agreed completely with Bush’s doctrine that, if you intentionally provide safe harbor to our enemy, then you ARE our enemy. When Bush went into Iraq, I said, “That’s the end of a clean victory in Afghanistan. Now we’re going to be stretched thin, and things will drag out forever in Afghanistan. Worse yet, we could use the money we spend in Iraq to make major improvements in the life of Afghanis as we did with Germany and Japan under the Marshall Plan and spend money winning the peace and not just winning the war. Nobody in government was interested. They can approve money to go blow things up in foreign countries but not to build railroads and bridges and highways and schools. Had we done that, the Afghanis might have thought, “Wow, we never saw things improve as much for the common person as we did when America came in.” It was an opportunity squandered.

        • jakartaman

          I will not welcome any American hater
          Must be supporter of the female criminal running for president. No I think he is a moronic Brit.

          • And, if he’s a British American hater, it’s not as if that nation’s hands are blood-free or free of imperialism.

            It’s always a laugh to me when Brits ridicule Americans for imperialism. Much as I love the British, on that particular issue, a Brit complaining about American imperialism is a bit like an alligator complaining about the beastly reptilian behavior of a salamander.

            Let’s be honest: The whole world’s hands are covered with blood, but that doesn’t mean I want to see a nation that supports so much terrorism as Iran has for decades get a nuclear bomb. Yeah, the world NEEDs more nuclear weapons! Israel has some that it will send to nations that attack it with nuclear weapons, so let’s make sure those surrounding nations all do have nuclear weapons so that Israel’s trigger finger will feel more itch. That way, we can get some great crossfire going and watch the whole region float away on a nuclear mushroom cloud!

  • Auldenemy

    The BBC ran an item last week concerning the Russian economy struggling due to its large currency devaluation, set against on-going sanctions from the West (due its stance in Ukraine). Even in the big cities folk are feeling the pinch. I can’t see how then, set against this background, Putin can afford to cut production, nor given Saudi Arabia’s growing deficit, how it can afford to either. Add in the fact that both Russia and Saudi Arabia know that if they cut production the embattled shale oil industry in America and Canada sure as hell won’t, and this talk of an oil, ‘cut back’ is only talk. There is also another factor, as in global manufacturing contraction, so even with oil cheaper a lot less is being used. Cut backs in oil production, far from solving that will accelerate that decline. Then are the millions of Western Joes like myself who despite oil being a lot less expensive simply do not have the income to keep our central heating on in every room in our homes, nor have it on more than a few hours a day. I sleep with my PING golf hat on and if it falls off I wake up with a freezing cold head. Cheaper oil has not made up for my income never rising. Factoring all these things in, my conclusion on the recent oil price rise is simply the result of a dead cat bounce. The PPT are throwing their all at keeping oil above $30 per barrel, helped by fast buck speculators going with the, ‘Russia and Sadi To Cut Production’ meme. Basically what ever happens in stocks makes no difference to what is happening down here in reality! The S&P500 rose quite a bit yesterday on nothing but lousy news, but then its got good at doing that because it is a figment of manipulation rather than what it once was, a reflection of the state of our economies.

    • I have heard it said a few times (mostly by people who tend to be bullish on the market) that the final thing that is needed for a major stock market crash to happen is euphoric behavior. I said that euphoria would make itself evident when the Fed made its first rate rise in a decade, and the stimulus-addled market rose briefly. It would rise because investors were euphoric that the market didn’t crash as some of us chicken-littles said it would. It would fall shortly thereafter because the rise was euphoric, and euphoria has no staying power. Once reality set in, it would fall hard.

      It did all of that, but that pales in comparison to the kind of euphoria we see now. Back in the days when bad economic news meant the Fed would keep its foot down hard on the accelerator a little longer, the rise of the stock market in the face of bad economic news was actually totally rational, though it seemed irrational to many. The fact was simple: the Fed was by far the biggest game in town. It’s stimulus was far more significant to the ability of the market to rise than any one bit of news. (Where do you think all that money was coming from that was going into the market. It sure wasn’t from revenue increases.)

      Now the Fed is done, and the stock market isn’t going up right now because of bad news; it’s soaring for the moment because of the least shred of good news. It’s not news that will put the Fed back in the game because it is ever so slightly good in terms of how it is being broadcast and repeated everywhere.

      The market is going up because the Saudis and Russians talked. Whoohooo! Is that euphoria or what? They TALKED! The market reaction was so euphoric to that news that a bear-market rally developed (the kind that is short lived because it is based on euphoria — pure hot air).

      In a state of euphoria, you’re not really listening, and you hear what you want. So, when Saudi Arabia and Russia said, “We promise to hold production at these high levels for as long as it takes to crush our competitors” the glassy-eyed bulls heard, “We’re not going to increase production!” And when the Saudis and the Russians said, “But we’ll only hold off on increasing production so long as everyone else holds off,” the speculators heard nothing at all. They were already too busy partying over the mere news that things that were already terrible were not going to get worse.

      Except they are going to get worse, but euphoric people are too busy partying to pay attention to the fact that the house is on fire. Iran is entering the market and has promised to make things much worse. They’ve said outright that they will increase oil production as quickly as they possibly can, and they’ve already started pouring money into doing that.

      Moreover, those oil tanks that are now at 97% capacity in some places will quickly become oil tanks that are 97% capacity everywhere in the world because you know storage facilities outside of these major hubs have been filling up, too. They will NEVER hit 100% capacity because we keep using oil, so even in a situation of huge oversupply, there is always a tank that has just been drained somewhere that can be refilled; but as soon as we reach that point where the only reason there is an empty tank anywhere on earth is that we just tapped it off for immediate refining, and as soon as we reach the point where the tanks at the other end of the refinery are full so that refining has to slow down, too, then an enormous hole will open up in the floor of oil pricing.

      YOU COULDN’T PAY SOMEONE TO TAKE OIL FOR IMMEDIATE DELIVERY in that situation, other than the person here or there who has a tank that just opened up. So, the price has to drop to scrap level on oil for immediate delivery.

      We are one to two months out from hiding that point of total market saturation.

      Obviously none of the people who bid up the price of oil this week have their eyes open or are thinking 1-2 months down the road. If they did, they would hear that the Saudis and Russians plan to continue full speed ahead to the brink of that cliff and fully intend to push the market over the edge in order to break as many of their competitors on the rocks below as they can. It’s now a headlong rush of the lemmings for the cliff.

      When the market says “woohoo” to that, you know it is nuts. The speculation is based on complete euphoria where investors are only hearing the bits and pieces they want to hear. They’re tuning everything else out, and that is EXACTLY the kind of behavior that people have described as being essential for a really severe market crash because their eyes don’t focus until they’re actually falling off the cliff, and then they open in sheer terror.

      While I could lose a $10 bet that the market will end down this week, I won’t lose on where things are headed. The bet for this week is a 50/50 chance at best because that euphoria certainly isn’t going to break this week unless some terrible black swan flies in out of nowhere. The breakout in the floor of oil prices is probably a month or two away (however long it takes for those tanks to effectively reach 100% full).

      So, my offered bet for this week is just based on guessing how long the euphoria can maintain enough hot air to keep rising before it starts to cool and settle again. I think it will close the week below yesterday’s high, but it could easily rise a little more due to euphoria over the the euphoria (that feeling of whoopee, we’re rising!)

      –David

      • Euphoria reigned in 2007, just before the bottom fell out. I recall hearing housewives in the grocery store who were giddy with tales of their new McMansion, their posh vacays, etc., etc. Those same women now look haggard, as do their husbands — although many of them are now divorced. Euphoria has not yet caught up with those who got hit hardest (age 50 and over).

        However, there are a number of people (mostly under age 50) who are feeling pretty positive right now. So much so that a local renovator told me that 2016 will be his best year since the crash, and was stupefied when I told him that I was delaying any renovations because I want to keep cash close and perhaps pick up a property at fire sale prices when the next crash happens.

        He really was dumbfounded. Just like in 2007.

        • I remember that, too. you couldn’t talk people into believing anything bad was about to happen. The well-healed real estate agent who sold at a five-star resort in Hawaii was in a slump, but he thought I was completely out to lunch when I said the slump was the beginning of a crash. Real estate never crashes.

          When these people do go through something like that, the only thing they seem capable of seeing in the future is if the exact same thing happens again. Tell them the crash is going to develop first elsewhere, and they are as disbelieving as they were the first time. All they can say is that “real estate is in nowhere near as bad as shape as it was back then.”

          But they didn’t see the bubble in real estate back then, even when you explained it to them. What they cannot see this time is that real estate is not going to lead the crash. The failure of junk bonds and the coinciding crash of the stock market is leading the crash already. Oil is the primary driver in the failing junk bonds; but we have a lot of subprime auto loans starting to flush to.

          We’re in the early stages like we were in the first half of 2008. Even though things started descending in 2007, people still couldn’t see it happening around them in the first half of 2008. We’re at that point right now, but what is lowering and starting to give way is oil junk bonds and the stock market. As those continue to stuff away, they’ll take out a major bank somewhere, and that will trigger a much bigger landslide.

          Then, as people lose lots of money in stocks and oil and in crashing banks, and employment starts going backward, you’ll see the housing industry start to seriously slide. It is already seriously sliding in the oil pockets as boom towns now go bust.

          I like your position: hold your money for now, and you’ll get a much better price on revocation later and will be in a position to snap up some of the foreclosure bargains that start to appear a year from now.

          The majority … never learn because they all keep following what has been working for them and are unwilling to see things they don’t like. (It’s just negativity to them, not forewarning. They never do see it coming and that is exactly why massive crashes happen. When the time to run is obvious, it’s an all-out panic.)

          –David