Markets oil OPEC

There’s Too Much Damn Oil. And Nobody Wants It.

Some worry no cut will be sufficient to balance a market with nonexistent demand.

To sell the news or not to sell the news.

That will presumably be the question later this week following a hotly-anticipated OPEC+ virtual meeting on Thursday.

Crude surged ahead of the teleconference, which by almost all accounts will ultimately produce an agreement on a large cut to stabilize prices, which plunged the most on record in the first quarter as acrimony between Riyadh and Moscow collided with the largest demand shock in history to create a crisis unlike any other.

The EIA on Wednesday reported a 15.18 million barrel rise in crude stockpiles, the largest weekly build in data going back to 1982.

At the same time, gasoline demand slumped to the lowest in weekly data going back some three decades.

Data on the supply of finished motor gasoline shows a plunge to levels never witnessed in figures back to February of 1991.

That seems incredible until you consider the circumstances. State-level data shows demand plunged as stay-at-home orders proliferated late last month and in early April. If you can’t drive, you don’t need gas.

And it’s the same story in Europe, where gasoline demand in the UK and Spain plunged 65% (versus the two-month average) and 83% (annual basis), respectively during late March.

“Marathon Petroleum plans to idle its Gallup, New Mexico, refinery next week”, Bloomberg reported on Wednesday, citing a person familiar with the matter and noting it would be “the first US facility to shut as the coronavirus pandemic empties skies of passenger planes and the roads of cars”.

But it probably won’t be the last. Once minimum levels are reached, more facilities may simply be idled. And, as the linked piece from Bloomberg makes clear, “simply” is a misnomer, as “slowing down a refinery isn’t like turning down the fire on a gas range when the water threatens to boil over”. Rather, these facilities are “a complex web of interconnected units”. In short, you don’t really want to have to shut the whole thing down.

Against this backdrop, OPEC+ and other global producers face an impossible task: Mending ties in the fractious alliance on the way to orchestrating a supply cut large enough to somehow balance a market that faces an almost complete dearth of demand for petroleum products.

Late Wednesday, reports indicated Russia is willing to cut 1.6 million barrels/day, around 14% of the country’s production.

Meanwhile, GOP lawmakers implored Mohammed Bin Salman to do something to ameliorate the situation. “The Kingdom can change course, reduce production, and restore balance to a market that has seen the most drastic price drop in years”, a letter from House Republican Whip Steve Scalise and other House Republicans reads. “But if the Kingdom fails to act fairly to reverse this manufactured energy crisis, we would encourage any reciprocal responses that the US government deems appropriate”, the letter warns.

Also on Wednesday, Algeria said the OPEC+ emergency meeting will, in fact, center around a “massive output reduction, which may reach 10 million barrels a day”.

As a reminder, virtually no one thinks that’s going to be enough.

As Goldman’s Jeff Currie put it late last month, “not only is this the largest economic shock of our lifetimes, but carbon-based industries like oil sit in the cross-hairs as they have historically served as the cornerstone of social interactions and globalization, the prevention of which are the main defense against [pandemics].”


3 comments on “There’s Too Much Damn Oil. And Nobody Wants It.

  1. Game of chicken now on who shuts down. No other way of looking at it. Could be some environmental damage. Some of the poorer producers are in a world of trouble.A few weeks back someone mentioned the price of oil could go negative.
    That famous friday all of OPEC awaited Russia and assumed they would say that they were weather constrained about reducing. Russia wanted to put US oil out of business . Perfect storm along with Corona. I thought it was a chess move by Putin to attack all overated corporates. Saudis simply did a “You too” to Russia. That was so long ago. Funny Trump did not really say something when it might have mattered. He did muscle in the night S&P500 closed below his inauguration day.

  2. Some helicopter incentive money to convert refineries to use American oil?

  3. David Travis

    Conversion of refineries takes 1 year + minimum.

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