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Oil hits US$5. Why pumps will stay open if prices turn negative

JayDubya

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Oil hits US$5. Why pumps will stay open if prices turn negative

Oil hits US$5. Why pumps will stay open if prices turn negative

A barrel of Canadian oil is now worth less than a nice latte or a fast food combo, falling to about US$5 on Friday. With no relief in sight from the impacts of COVID-19 and the Saudi-Russian oil war, negative prices could be on the horizon.

Western Canadian Select (WCS) crude, the main grade produced in Canada’s energy patch, fell to a record low of US$5.03 on Friday, according to Bloomberg data going back to 2008. The steep decline has energy experts considering another unpleasant rarity for oil.

“There is no reason to think that oil prices couldn’t go negative for a period of time,” Raymond James analyst Jeremy McCrea told Yahoo Finance Canada. “I would have never considered it before. But in the current context, it’s not out of the realm of possibilities now.”

The cost of shipping for some heavy crude producers already outweighs the commodity price.

Meanwhile, production isn’t expected to slow down much. While 2020 spending expectations for North American exploration and production companies have fallen more than 20 per cent amid the historic downturn for oil prices, production expectations have only been reduced by two percent. That’s because shutting in production is a costly decision that cannot be quickly reversed.

“The big guys who supply a lot of this heavy oil, a lot of that is in SAGD-type operations. It can take years to reheat the reservoirs. You can’t shut these things down immediately. You will continue to have this production flow,” McCrea said. “You could get to a point where you do see negative prices.”

Hedges could protect producers in the near-term. That could, however, encourage them to pump when they should be cutting back to fall in line with weaker demand.

Price Street managing director and market economist Rory Johnston expects the high cost of turning off the taps could see companies choose to continue producing and weather negative prices for a time.

“You’re going to have this period where people are trying to figure out how long these prices are going to last, and only if they are considered to last a sufficiently long period of time will the costs of producing during that period outweigh the cost of shut-ins,” he told Yahoo Finance Canada.

Johnston added margins are already negative for many producers when the commodity price is this low.

“Even if it’s not negative outright prices, it’s effectively a negative margin for them.” he said.
 

Silver

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Natural Gas producers in West Texas were paying pipeline companies to take their gas a short time ago, probably still that way, don't know. Free wasn't cheap enough, they had to pay to get rid of it.
 

ErrosionOfAccord

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Rigs are getting stacked in Wyoming. Coalies are starting to get laid off. This will be a huge shit storm for Wyoming in the coming month as mineral royalties are how the state pays the bills. Not whining, just stating the facts on the ground. I’ve been designated as an “essential employee” wooo hooo! Will be until I’m laid off anyway.
 

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Buck

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Oil is the life blood of the worlds economies, yesterday, today and tomorrow

the abundance of it never supported any of those crazy prices we've all grown up with but the manipulation today does not indicate any true value for 'tomorrow' either...

at which price point should someone 'jump in'?
 

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Rigs are getting stacked in Wyoming. Coalies are starting to get laid off. This will be a huge shit storm for Wyoming in the coming month as mineral royalties are how the state pays the bills. Not whining, just stating the facts on the ground. I’ve been designated as an “essential employee” wooo hooo! Will be until I’m laid off anyway.
Temporarily essential...or in other words, ultimately expendable?
 

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Maybe we could pack up all that mining equipment and drilling equipment and ship it all to Brazil?

I've heard they have lots of oil and minerals in the Amazon Basin, maybe they'll park it all right next to the last batch of our equipment they got...
 

ErrosionOfAccord

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Yes.

https://www.eia.gov/electricity/monthly/update/fossil_fuel_stocks.php

Looks like those charts are updated quarterly. Rumor has it that the power plants are telling the mines to turn the spigot off and telling the mines they probably can’t take all of the coal they contracted for this year. The rail forecasters are saying it may not pick up until the end of the year. Rail workers with six and seven years seniority are starting to worry about furloughs.

Edited to add, it was bad before the beer virus. I’m afraid it’s going to get dire.
 

Scorpio

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thanks EA, always appreciated
 

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GOLDBRIX

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A barrel of Canadian oil is now worth less than a nice latte or a fast food combo, falling to about US$5 on Friday.
Lets be very clear here. Most Canadian Oil is sour or refined Tar Sands production. All of which make it more expensive somewhere along its production line.
Few refiners want the products until it is refined to a version similar to WTI (West Texas Intermediate ). So to move Canadian Sour the producers have to basically give it away at this point in time.
I suspect many Canadian producers will shutter one their contractual obligations expire. ( Been there when making money was good in the energy market).
 

Fatrat

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When they pay me to pump it into my car, I'll worry...or if they start giving out free glasses and little green dinosaurs...
 

GOLDBRIX

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When they pay me to pump it into my car, I'll worry...or if they start giving out free glasses and little green dinosaurs...
TOP VALUE ( yellow) or S&H green stamps ???
 

Goldhedge

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at which price point should someone 'jump in'?
Everyone's retirement account took a huge hit - and the fat lady still hasn't sung...

after this virus scare is over, I suspect oil will jump back to what it once was.

Would you trust an ETF, or just go all out on oil stocks?
 

GOLDBRIX

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after this virus scare is over, I suspect oil will jump back to what it once was.
Personally I believe the oil price currently is a pawn of Russia and the Saudis. Virus is not to blame for their pissin' contest.
 

ErrosionOfAccord

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Everyone's retirement account took a huge hit - and the fat lady still hasn't sung...

after this virus scare is over, I suspect oil will jump back to what it once was.

Would you trust an ETF, or just go all out on oil stocks?
I think it goes much higher than it previously was because it will take a while to remobilize the patch. I wouldn’t be surprised to see $100 per bbl again. At this point I think the real numbers on beer will start to show in the next month and all of this ridiculous hype will die down. Here’s the gist though. Why go out and drill like mad again when so many of the fracking companies are at a break even anyway? If I could afford them, I’d be buying the majors right now. I predict they will be the big winners in oil when this all comes out in the wash.
 

D-FENZ

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Personally I believe the oil price currently is a pawn of Russia and the Saudis. Virus is not to blame for their pissin' contest.
The pissin' contest got the ball rolling with an increase in supply, but the virus almost simultaneously kicked the demand side to the gutter setting up the perfect storm. No one is flying or driving anywhere. After everyone is done hoarding and the freight transportation slows down with the economy it could get a lot worse.
 

GOLDBRIX

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There go my "mineral rights" (in Michigan, from Grampa - bought in the 1930's)... They drilled (2 years ago), and so far the $25/month "income" has been going towards the "development costs"... Had almost finished (automatically) paying them, only a couple hundred bucks remaining... We'll see...
What is the land sitting on if you don't mind me asking ?
 

dacrunch

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Edit = returning Scorpio's precious bandwidth he says I've been wasting - should make it easier to delete all my posts & attachments in bulk...
 
Last edited:

Alton

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Here's another perspective from Oil Price:

Oil on the verge of dipping below $10 a barrel - UPDATE: Canadian oil now worthless at $6, and still falling



Nick Cunningham
Oil Price
Mon, 23 Mar 2020 20:00 UTC






Comment: UPDATE 30 March 2020

Canadian oil has fallen to just $6.50. That's 6.50 in US dollars...

Canadian analysts say they expect it to drop all the way to zero in the coming weeks.



The wave of oil industry spending cuts continues, with the majors now announcing significant reductions to spending as oil remains stuck in the $20s. Royal Dutch Shell said on Monday that it would cut spending by 20 percent, or about $5 billion, and also suspend its share buyback plan. French oil giant Total SA and Norway's Equinor announced similar moves.

ExxonMobil and Chevron have suggested they too would be axing their budgets, with Exxon under particular pressure. Goldman Sachs estimates that Chevron needs $50 per barrel in order to cover spending and its dividend. ExxonMobil, on the other hand, needs something like $70.

The majors are relatively more insulated from the downturn than small and medium-sized shale drillers because they have downstream refining and petrochemical assets that have typically performed somewhat better than upstream units when prices fall. Refineries, for instance, spend less on oil during the downturn, and low prices also translate into a boost in sales of refined products.

But the majors do not have that cushion this time around. We are in the midst of a historic meltdown - a supply crisis and a demand event with no precedent. Estimates vary, but oil consumption could be off by 10 million barrels per day (mb/d), or more. It doesn't matter how cheap crude is, if people are not driving, flying or consuming anything aside from the bare essentials, there is no demand boost from low prices.

On Monday, Exxon announced that it was cutting production at its Baton Rouge refinery, the company's second largest in the U.S., because poor demand has filled up storage tanks. Exxon also cut 1,800 contractors from the site. In another example, a major closely-watched petrochemical project in Appalachia may not go forward as the market sours.

The first round of spending cuts from the oil industry is now visible, but a second round is beginning, according to a report from Goldman Sachs.

"We see US oil production falling almost 1.4 mn bpd over five quarters post 2Q20 based on reduced drilling (i.e., before considering shut-ins of existing wells that are likely to be needed) with covered company capex down 35% [year-on-year] in 2020," Goldman Sachs wrote in a note.

However, budget revisions are not over. The slide in spending, drilling and ultimately in output could deepen as capex cuts grow more pronounced. "There is no sugar coating it, U.S. oilfield activity will collapse with oil prices well below $30 WTI," Raymond James said on Monday. The initial round of cuts put spending at about 45 percent below 2019 levels, the bank said. "However, the declines will be far more dramatic than these initial cuts and we stress that these announcements skew towards larger cap, better hedged and capitalized operators."

"Total U.S. capex is likely to fall in excess of 65% with a WTI price persisting in the $20s," the investment bank concluded.

Rystad Energy put out a similar estimate on Monday. E&Ps are likely to cut project sanctioning by up to $131 billion, or about 68% year-on-year, according to the Oslo-based firm. "Upstream players will have to take a close look at their cost levels and investment plans to counter the financial impact of lower prices and demand. Companies have already started reducing their annual capital spending for 2020," says Audun Martinsen, Rystad Energy's Head of Energy Service Research.

It's anybody's guess how low WTI and Brent go. But more than a few analysts have pointed to the potential for storage to max out as a reason why prices have more room to fall. "[N]o one can exactly be sure that production will be shut-in fast enough to not overwhelm our ability to store oil," JBC Energy said in a note. The firm pointed to refineries cutting processing because they are running out of storage, such as Exxon's Baton Rouge. "In such an environment, it is as possible for Brent prices to briefly go to $10 per barrel as it was back in 1986 or 1998," JBC concluded.
 

GOLDBRIX

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Here's another perspective from Oil Price:

Oil on the verge of dipping below $10 a barrel - UPDATE: Canadian oil now worthless at $6, and still falling



Nick Cunningham
Oil Price
Mon, 23 Mar 2020 20:00 UTC






Comment: UPDATE 30 March 2020

Canadian oil has fallen to just $6.50. That's 6.50 in US dollars...

Canadian analysts say they expect it to drop all the way to zero in the coming weeks.



The wave of oil industry spending cuts continues, with the majors now announcing significant reductions to spending as oil remains stuck in the $20s. Royal Dutch Shell said on Monday that it would cut spending by 20 percent, or about $5 billion, and also suspend its share buyback plan. French oil giant Total SA and Norway's Equinor announced similar moves.

ExxonMobil and Chevron have suggested they too would be axing their budgets, with Exxon under particular pressure. Goldman Sachs estimates that Chevron needs $50 per barrel in order to cover spending and its dividend. ExxonMobil, on the other hand, needs something like $70.

The majors are relatively more insulated from the downturn than small and medium-sized shale drillers because they have downstream refining and petrochemical assets that have typically performed somewhat better than upstream units when prices fall. Refineries, for instance, spend less on oil during the downturn, and low prices also translate into a boost in sales of refined products.

But the majors do not have that cushion this time around. We are in the midst of a historic meltdown - a supply crisis and a demand event with no precedent. Estimates vary, but oil consumption could be off by 10 million barrels per day (mb/d), or more. It doesn't matter how cheap crude is, if people are not driving, flying or consuming anything aside from the bare essentials, there is no demand boost from low prices.

On Monday, Exxon announced that it was cutting production at its Baton Rouge refinery, the company's second largest in the U.S., because poor demand has filled up storage tanks. Exxon also cut 1,800 contractors from the site. In another example, a major closely-watched petrochemical project in Appalachia may not go forward as the market sours.

The first round of spending cuts from the oil industry is now visible, but a second round is beginning, according to a report from Goldman Sachs.

"We see US oil production falling almost 1.4 mn bpd over five quarters post 2Q20 based on reduced drilling (i.e., before considering shut-ins of existing wells that are likely to be needed) with covered company capex down 35% [year-on-year] in 2020," Goldman Sachs wrote in a note.

However, budget revisions are not over. The slide in spending, drilling and ultimately in output could deepen as capex cuts grow more pronounced. "There is no sugar coating it, U.S. oilfield activity will collapse with oil prices well below $30 WTI," Raymond James said on Monday. The initial round of cuts put spending at about 45 percent below 2019 levels, the bank said. "However, the declines will be far more dramatic than these initial cuts and we stress that these announcements skew towards larger cap, better hedged and capitalized operators."

"Total U.S. capex is likely to fall in excess of 65% with a WTI price persisting in the $20s," the investment bank concluded.

Rystad Energy put out a similar estimate on Monday. E&Ps are likely to cut project sanctioning by up to $131 billion, or about 68% year-on-year, according to the Oslo-based firm. "Upstream players will have to take a close look at their cost levels and investment plans to counter the financial impact of lower prices and demand. Companies have already started reducing their annual capital spending for 2020," says Audun Martinsen, Rystad Energy's Head of Energy Service Research.

It's anybody's guess how low WTI and Brent go. But more than a few analysts have pointed to the potential for storage to max out as a reason why prices have more room to fall. "[N]o one can exactly be sure that production will be shut-in fast enough to not overwhelm our ability to store oil," JBC Energy said in a note. The firm pointed to refineries cutting processing because they are running out of storage, such as Exxon's Baton Rouge. "In such an environment, it is as possible for Brent prices to briefly go to $10 per barrel as it was back in 1986 or 1998," JBC concluded.
I'm glad I got out when I did.
Years ago when the small producers began to eliminate DIVs I got that feeling things were about to change.
I never thought it would get this low/ this bad ( for investors & the Cos.) though.