Ten signs the oil industry is bent out of shape

Ten signs the oil industry is bent out of shape

Reuters  | Mar 26, 2020 03:00

Ten signs the oil industry is bent out of shape

By David Gaffen

(Reuters) - The oil industry has been hit by a simultaneous demand and supply shock in March as the coronavirus pandemic cuts fuel consumption and top producer Saudi Arabia raises output to full capacity to fight a price war with rivals.

International crude oil prices have lost about 45% this month and fallen below the cost of much of the world's production, causing energy companies worldwide to slash spending by tens of billions of dollars.

The collapse in demand and of energy diplomacy between Saudi Arabia, Russia and others have triggered unprecedented responses from governments and investors. Here are ten signs of an industry in distress.

SAUDI ARABIA GOES ALL-IN

Riyadh shocked the oil industry by going on the offensive after talks collapsed with Russia in early March on a deal to cut supply to compensate for how coronavirus was hitting demand.

Saudi Arabia slashed export prices and said it would pump at a record of 12.3 million barrels per day, pouring a flood of oil into a market that needed less. It lined up an armada of ships for export, targeting refiners that buy Russian crude, as well as the United States, wiping out profit margins for U.S. exports.

The moves were all the more shocking coming from a producer that for years has had a role akin to the industry's central bank. The kingdom is the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC) and for decades adjusted output more than any other oil producer to keep markets balanced.

TEXAS CONSIDERS CUTTING PRODUCTION?

Producers in top U.S. producing state Texas went to regulators - and asked them to intervene to cut production. Texas does not intervene that much. The last time was in 1973. To be sure, other Texas commissioners and oil industry groups have thrown cold water on the idea.

WITH OPEC?

One of three Texas commissioners at the body that regulates the industry got a call from the secretary general of OPEC to discuss the market. Commissioner Ryan Sitton said on Friday that Texas could consider a 10% output cut, possibly in coordination with that group. Before now, U.S. shale oil producers dared not consider coordinated cuts for fear of violating U.S. anti-trust laws.

HISTORIC SELLOFFS

Three of the steepest declines in benchmark Brent crude have taken place in the last two weeks - March 9, March 16, and March 18

On March 9, Brent dropped 24%.

On March 16, Brent dropped 11%

On March 18, Brent dropped 13%.

On March 23, the U.S. gasoline market plummeted the most ever in one day, as futures lost 32% to hit a record low.

(GRAPHIC: Global Oil Slump - https://graphics.reuters.com/USA-OIL/0100B5LV472/index.html)

JET FUEL IN STORAGE

Jet fuel deteriorates quickly in storage, and then it cannot be used. Yet demand has fallen so fast as airlines ground aircraft around the world that firms including oil majors BP (L:BP) and Royal Dutch Shell (L:RDSa) both sought to lease ships just to store unneeded jet fuel.

REFINING GASOLINE COSTS MONEY

You want to make gasoline? It'll cost you. On Monday, the margins to produce U.S. gasoline - the price for a barrel of oil minus a barrel of gasoline - closed at a negative price, which means refiners would lose money buying crude to make the fuel. Gasoline typically drives the energy complex, as fuel for vehicles accounts for most oil demand worldwide. The margin fell to minus $1.11 a barrel on Monday, its lowest since 2008.

RUSSIA DIGS IN, ROSNEFT CELEBRATES SHALE WOES

Rosneft (MM:ROSN) Chief Executive Igor Sechin was unwilling to give ground as the U.S. shale industry faced collapse. Oil prices could go back to $60 a barrel if "shale oil leaves markets," he said on Friday. On Monday, his rival, Lukoil (MM:LKOH) co-owner Leonid Fedun, said "this will be a war until exhaustion."

ETHANOL? NEVER MIND

Corn and sugar supplies look set to rise this year as fuel suppliers make less ethanol for blending into gasoline. Companies such as France's Tereos are shifting ethanol production to industrial uses like hand sanitizer, while sugar producers in Brazil are aiming to make more of the sweetener rather than the fuel.

LATE-DAY CRAZINESS

Volatility in oil markets has been exacerbated as oil companies stay out. That leaves speculators, and makes for rapid moves in prices around the close of trading. Thursday's rally was so great that post-close trading had to stop; Friday was the reverse, with prices that dove by $4 at the end of trading.

"It's a crazy market. I don't know how to trade this," one futures trader said.

REFINERS STAY SHUT

French major Total (PA:TOTF) shut its Grandpuits refinery, located outside of Paris, early in March for maintenance. When it was time to restart the 102,000 barrel-per-day facility, Total said...never mind. Demand weakened so quickly that it figured it would just keep it offline. While others have closed, major refiners outside Los Angeles, California, have curtailed production because of lackluster demand.

PETROL PUMPING BECOMES UNSAFE

© Reuters. The sun sets behind a crude oil pump jack on a drill pad in the Permian Basin in Loving County

One of the nations hit worst by the coronavirus pandemic, Italy, is simply shutting its petrol stations. They started to close on March 25 on the nation's motorways, operators there said, because it was impossible to guarantee health safety standards and keep businesses going.

Related News

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Discussion
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (UK) English (India) English (Australia) English (South Africa) English (Philippines) English (Nigeria) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 中文 香港 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
NoYes
CancelYes
Saving Changes

+

Download the App

More markets insights, more alerts, more ways to customize assets watchlists only on the App