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Maggette


Total Posts: 1268
Joined: Jun 2007
 
Posted: 2020-03-09 05:55
A little bit embarrassing for somebody who once worked in the energy space (not crude though).. Can somebody give me some insight on what happened?

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...

kloc


Total Posts: 40
Joined: May 2017
 
Posted: 2020-03-09 06:12
https://finance.yahoo.com/news/oil-futures-fall-over-20-221934338.html

https://www.cnbc.com/2020/03/08/opec-deal-collapse-sparks-price-war-20-oil-in-2020-is-coming.html

Maggette


Total Posts: 1268
Joined: Jun 2007
 
Posted: 2020-03-09 06:32
Yeah. That's the official narrative.

I my personal experience, in the markets I worked in, the talking heads were almost always full of shit. I do believe SA presenting ratjher aggressive quotas is a valid reason. Not sure if I believe it is the whole reason for a 30% drop.

I was hoping somebody could shed some light on the interplay of the current situation on storage, hedging positions of consumers and producers etc.

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...

kloc


Total Posts: 40
Joined: May 2017
 
Posted: 2020-03-09 06:55
Well, between airliners reducing their hedges, OPEC+ spat, SA increasing production... something had to give.

I agree with your general sentiment about the talking heads, but this time they might not be wrong, just backwards-looking (which is the best they can do anyways).


Kitno


Total Posts: 497
Joined: Mar 2005
 
Posted: 2020-03-09 07:09
Certain producer (countries'), mostly ME, need absolute revenue maximization in the light of their government fiscal situation. Hence max production against no demand.

Just think of the CSA'd hedged airlines: huge passenger fall and hedged for that load so much higher. How many cars do you see on the road in Wuhan? Etc.

On a laager on a hill. A long way from Avondale.

Maggette


Total Posts: 1268
Joined: Jun 2007
 
Posted: 2020-03-09 13:48
Thx to both of you!

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...

nikol


Total Posts: 1230
Joined: Jun 2005
 
Posted: 2020-03-09 15:28
Case of nov-2008 happened due to collapse of trade finance (banks have blocked the liquidity), which blocked many trade deals, which caused collapse of transportation volumes and logistics and hence diesel and oil prices.

Today we have:
- blown up monetary base of USDollar vs
- huge production capacity of China,
- which much relies upon transportation with air to both US and Europe

https://www.stattimes.com/news/covid19-cripples-global-air-cargo-supply-chain/

What I do not understand is why covid19 has impact on air-freight, but not on ALL routes, first of all sea and second rail. Freight companies offer rail as substitute of air. Is it because of the virus vitality not lasting on goods for at least 2 weeks?

Patrik
Founding Member

Total Posts: 1369
Joined: Mar 2004
 
Posted: 2020-03-11 16:31
It's simple in this case - no deeper inside knowledge required. covid19 demand effect people had already pencilled in a 1-2mm bpd drop, combined with a MoM supply effect of some 2-4mm bpd depending on how much weight one wants to put on the highest production levels touted by the Saudis and others. On those figures we build an enormous amount of inventory, 100s of millions of barrels pretty quickly. Completely unsustainable so the function of the market needs to be steep contangos to store and low enough prices to cut off some production (over time).

Storage is pretty empty so we'll see storage owners minting money if these conditions stay put for a while. It's a slinky effect, spreads go to fill up the cheapest storage (inland, easy access), then gap down to next level cost and so forth until you have filled up your most expensive floating storage. If you fill that as well you get into super contango conditions.

@nikol: what makes you say it only impacts air travel and air-freight?
It is differentiated by what your cargo is obviously - e.g. clean freight, VLCCs etc, got a massive bid on the back of the increased Saudi (and others) export intentions and spreads getting weak enough for floating storage to be viable. But generally all freight exposed to activity slowdown will suffer from lack of demand.

Capital Structure Demolition LLC Radiation

Maggette


Total Posts: 1268
Joined: Jun 2007
 
Posted: 2020-03-11 18:43
THX,

I more or less was hoping for an answer from Patrik. Hence, mission accomplished.

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...

rickyvic


Total Posts: 222
Joined: Jul 2013
 
Posted: 2020-03-12 16:10
Same reason why gold goes up. Curve effects are a symptom not the cause.
Another symptom of the covid19

"amicus Plato sed magis amica Veritas"

Kitno


Total Posts: 497
Joined: Mar 2005
 
Posted: 2020-03-12 16:27
From a Saudi perspective pretty neat - kill off (at least in the medium-term debilitate) the competition (both sovereign producers and alternative i.e. renewable power)

On a laager on a hill. A long way from Avondale.

nikol


Total Posts: 1230
Joined: Jun 2005
 
Posted: 2020-03-12 17:21
Why break even for Saudi is 80 usd? 30% dump will not be compensated with market share.


kloc


Total Posts: 40
Joined: May 2017
 
Posted: 2020-03-12 17:47
I was about to ask the same thing.

Based on the usual range of numbers for breakeven oil levels which were thrown around over the last year or so, Saudis look more vulnerable to oil price drop than Russia? That is, if they're after Russia at all...

Kitno


Total Posts: 497
Joined: Mar 2005
 
Posted: 2020-03-12 17:59
I'm not a commodities guy but with a tired brain...

If Saudi brings the curve down (not just spot/near term) every man and his dog will hedge long term needs at these levels. You damage the rationale for rewables for term and you have got the big majors locked in through derivatives to being on the wrong side as you cut production and let Spot prices rise and so Aramco's fortunes as well as Saudi's deficit being sated?

This does seem a stretch of an argument...

At the end of the day Saudi's don't want renewables, have a bad sovereign financial deficit, don't like US oil autonomy (shale), and need Aramco to do well. So make renewables uneconomic, kill off shale through blowing up their debt funding,
hurt the Western majors.

On a laager on a hill. A long way from Avondale.

nikol


Total Posts: 1230
Joined: Jun 2005
 
Posted: 2020-03-12 18:59
So, Saudis hate renewables-West and all good what comes with it (especially weapons). Not sure if this works.

Bloomberg and WSJ try to present it as a war between Saudis and Russia (russians show absolute calm).

Truth is somewhere orthogonal.

Kitno


Total Posts: 497
Joined: Mar 2005
 
Posted: 2020-03-12 19:57
@nikol - I agree

On a laager on a hill. A long way from Avondale.

nikol


Total Posts: 1230
Joined: Jun 2005
 
Posted: 2020-03-13 16:44
It looks like the keys to the puzzle are:

- shale hydrocarbons allow US to not import them. This frees demand for the market and puts excess pressure on supply. The aim is Russia, Iran, Venezuela. The last one is the most vulnerable.
- wish to get hand over Venezuela oil reserves to backup shale oil/gas as pressure tool (today this is not a coincidence):
https://www.bloomberg.com/news/articles/2020-03-12/u-s-sanctions-rosneft-subsidiary-for-backing-venezuela-s-maduro
- stagnation of shale oil/gas and large debt ticket attached. It's already stretched and is under limit and, therefore, the above strategy might be broken.

Main goal is to keep oil/gas priced/traded in dollars. Not because of the dollar itself, but first of all because it gives SEC a handle to control and approve all transactions. This alone is extremely important. Utmost. I don't know how to put stronger emphasize. That's what Secretary of Defense Ashton Carter meant naming Russia as "existential threat".

If it will not work, oil will rocket to the sky.

kloc


Total Posts: 40
Joined: May 2017
 
Posted: 2020-03-13 17:16
@nikol: Why would pricing oil in EURs (or CNYs...) raise oil price?

Its Grisha


Total Posts: 61
Joined: Nov 2019
 
Posted: 2020-03-13 17:25
There is a very thoughtful analysis of the situation in this podcast. The Deep Basin guys are the most sophisticated energy sector focused fund that I know of.

Full disclosure, I am connected to the parties involved but think there is a lot insight here.

http://investorfieldguide.com/deepbasin2/

nikol


Total Posts: 1230
Joined: Jun 2005
 
Posted: 2020-03-13 18:03
@klok

Why in EUR? does Europe control anything? Not Yuan, Yen, Pound, not even Ruble. Likely it will be whatever two counter-parties agree for a while.

Oil reserves available for the market are controlled with sanctions,
(ADDED) but still it is shrinking. Not sure how long shale production will last, but it will impact the price. Again, sanctions is the way to control supply.
(ADDED2) imagine scenario where dollar is not central point anymore. What happens to shale projects? What happens to oil price if they collapse?

@ITs_Grisha

Unfortunately, they don't have script, but thank you.

Maggette


Total Posts: 1268
Joined: Jun 2007
 
Posted: 2020-03-13 18:08
@Its Grisha
Thx for the link

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...

nikol


Total Posts: 1230
Joined: Jun 2005
 
Posted: 2020-03-14 09:21
25-28 vs 30 by Saudi vs Russia at Rotterdam / ARA.
Even thought tanker freight has soared 10 times.
Looks like things are getting existential for all sides.

https://www.reuters.com/article/us-oil-opec-saudi/saudi-arabia-floods-markets-with-25-oil-as-fight-with-russia-escalates-idUSKBN21022H

TonyC
Nuclear Energy Trader

Total Posts: 1352
Joined: May 2004
 
Posted: 2020-03-16 06:40
DOUBLE post



flaneur/boulevardier/remittance man/energy trader

TonyC
Nuclear Energy Trader

Total Posts: 1352
Joined: May 2004
 
Posted: 2020-03-16 06:40
Nikol,

Indulge an old man who may have some old-fashioned ideas about the oil market

shouldn't tanker rates be up? Don't we expect them to be up?

As the Saudis and the Russians play the "whoo can pump more volume" game; shouldnt increasing the supply in the spot market drive the market into further contango, thus raising the demand for floating storage? hence increasing tanker rates from 25k or 30k a day to 200k a day?

That's the story of why I'm long STNG & TNK , anyhow



flaneur/boulevardier/remittance man/energy trader

Patrik
Founding Member

Total Posts: 1369
Joined: Mar 2004
 
Posted: 2020-03-16 09:25
@nikol:

Similarly to @tonyc I can't say I follow much of your last 3 posts. I'm interested though - care to run through your ideas in a bit more long form?

Capital Structure Demolition LLC Radiation
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