Here’s Why A Standoff Between Oil Producers Is Fueling Surging Gas Prices

Oil Prices Hit Historic High On Weak Dollar

As oil prices spike to a nearly three-year high, a bitter disagreement between international oil producers has shattered hopes for a deal to increase oil production this year—thereby threatening to further hike up rising oil and gas prices as a broad economic reopening looks to ramp up travel demand.

Key Facts

Following two days of fraught discussions last week, the group of oil producers known as OPEC+ called off an afternoon meeting Monday and set no date to meet again, effectively suspending a planned agreement to raise output by 2 million barrels per day from August to December

Two unnamed sources told Reuters the failed negotiations mean the expected production hikes this year will no longer occur.

The price of U.S. oil benchmark West Texas Intermediate—at about $75.31 a barrel—jumped 1.3% Monday after the news and has climbed 5% over the past week’s disagreement, while the price of the United Kingdom’s Brent Crude ticked up 1.1% and 4%, respectively.

The United Arab Emirates, which has invested heavily in its oil production capacity, refused to move forward with the deal because it would also extend oil production cuts through late 2022.

Though the UAE wants to raise its output unconditionally, Saudi Arabian oil producers, who supported the agreement, argued the extended output cuts are necessary to prevent excess oil supply that could tank prices.

The production increase was meant to help curb rising oil prices and buy producers time while they assess the risk of rapidly spreading variants in countries like India once again hurting demand and shuttering economies.

Big Number

60%. That’s how much the price of WTI oil has surged this year alone, while the price of Brent Crude has climbed about 50%.

Tangent

Oil prices crashed last year but recouped all their pandemic losses by March, and they’ve surged roughly 20% higher since. After cutting production by about 10 million barrels per day last year, oil producers are still supplying about 5.8 million fewer barrels per day than before the pandemic. Most recently, OPEC+ in early June agreed to increase oil output by 450,000 barrels per day starting this month.

Key Background

Despite the easing of lockdowns and an accelerating vaccine rollout, producers have been careful to ramp up supply after excess inventories drove prices down to negative territory for the first time in history last spring. That happened after an all-out price war erupted between oil-producing giants Russia and Saudi Arabia in March 2020—just as travel demand began to plummet during the coronavirus outbreak.

Costly-to-maintain storage tanks soon filled up with no buyers, and the price of one American oil futures contract plunged below zero in April 2020. OPEC and its allies agreed to cut production in order to stabilize prices amid the turmoil, but according to the International Energy Agency, those inventories are still being worked off to this day.

Further Reading

OPEC+ resumes oil policy talks amid Saudi-UAE standoff (Reuters)

Oil Producers Agree To Boost Production By 450,000 Barrels Per Day As Travel Picks Up (Forbes)

OPEC Plus Agrees To Ramp Up Production By 500,000 Barrels Per Day Starting January, Ending Bitter Standoff In Bid To Save Oil Prices (Forbes)

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I’m a reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism and economics while working for UNC’s Kenan-Flagler Business School as a marketing and communications assistant. Before Forbes, I spent a summer reporting on the L.A. private sector for Los Angeles Business Journal and wrote about publicly traded North Carolina companies for NC Business News Wire. Reach out at jponciano@forbes.com. And follow me on Twitter @Jon_Ponciano

Source: Here’s Why A Standoff Between Oil Producers Is Fueling Surging Gas Prices

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References

Brent Oil Extends Gain as OPEC+ Talks End Without Supply Deal

Brent oil extended gains after OPEC+ ended days of talks without a deal to bring back more halted output next month, depriving the market of vital barrels as the global economic recovery gathers pace.

Futures in London traded above $77 a barrel after rising 1.3% on Monday. The failure to reach an agreement means current production limits will remain in place for August unless talks are revived. A disagreement over how to measure output cuts upended a tentative proposal to boost supply and devolved into a public spat between allies Saudi Arabia and the United Arab Emirates.

The situation is fluid and negotiations may be reactivated in time to add more output in August. However, the breakdown has damaged the group’s image as a responsible steward of the market and raised the specter of a repeat of last year’s destructive price war that sent oil crashing.

“In theory, if the group keeps output unchanged in August that should be bullish for the market,” said Warren Patterson, the head of commodities strategy at ING Group NV. “However, in reality, what is the likelihood that members actually keep output unchanged? I don’t think it’s very high.”

The global market has tightened significantly over the past few months amid a robust rebound in fuel demand in the U.S., China and parts of Europe, draining stockpiles built up during the pandemic. The International Energy Agency last month urged the OPEC+ alliance to keep markets balanced as worldwide demand accelerated toward pre-virus levels.

The market has moved further into a bullish structure after the breakdown of talks. The prompt timespread for Brent was 99 cents a barrel in backwardation — where near-dated contracts are more expensive than later-dated ones — compared with 87 cents on Friday.

OPEC+ had restored about 2 million barrels a day halted during the pandemic from May to July. The alliance was close to a deal to raise daily output by a further 400,000 barrels in each month from August through December, as well as extend the supply pact beyond April 2022. The UAE, however, said it would only accept the proposal if it was given better terms for calculating its quota.

The UAE said throughout that it would accept the output increase without the deal extension, but the Saudis argued that the two elements must go together.

Related news
Prices
  • Brent for September settlement rose 0.4% to $77.48 a barrel on the ICE Futures Europe exchange at 12:02 p.m. in Singapore.
  • West Texas Intermediate for August delivery gained 2% from Friday’s close to $76.69 on the New York Mercantile Exchange.
    • There was no settlement Monday due to a U.S. holiday.

With no imminent boost to OPEC+ supply, the market is likely to tighten further and could result in Brent climbing to $80 a barrel by September, according to UBS Group AG. It’s unclear if the no deal will translate into lower compliance rates next month, although the the release of Saudi Aramco’s official selling prices for August should provide more clarity, the bank said.

— With assistance by Keith Gosman

 

How One Bad Oil Bet Sparked A Global Trading Disaster

By now we are all keenly aware of the near-devastating impact that the novel coronavirus has had on oil markets and the fossil fuel industry around the world. (If this is news to you, what rock do you live under and is there room for one more?) But while a lot of the narrative here in the West has been about the historic oil price crash in what some are now referring to as Black April, the oil trading catastrophe actually started much earlier and can largely be traced back to the bad bet of just one man, Singapore’s commodities tycoon Lim Oon Kuin. 

The story of the oil market instability that ripped through Asia starting in China is not so much one of struggling oil companies, but a story of banking – that unsexy, behind-the-scenes sector that all too often gets none of the headlines and all of the control. It started way back in January, when most of us were just starting to gain some awareness of a strange and scary illness devastating the Chinese city of Wuhan.

Lim Oon Kuin, sitting in his office 2,000 miles away in SIngapore, watched as this news unfolded and made a decision. He decided that China would gain control of this epidemic before it turned into a pandemic and began stockpiling fuel, quietly adding to his already vast reserves. It should come as no surprise that that bet didn’t work out. 

As the coronavirus spread around the world and tanked global crude demand, as well as oil prices, a chain reaction of defaulted loans, was set off in Singapore that is still reverberating in global markets today.

“Banks tried to recover loans from Lim’s company, Hin Leong Trading Pte, triggering one of the biggest scandals in the oil industry this century,” Bloomberg reported about the bad deal that has left a permanent mark on oil trading.

“Lim’s empire collapsed, owing $3.5 billion to 23 banks, and the fallout from the debacle is still reverberating into 2021, shaking out large tracts of the vast and often opaque $4 trillion global oil-trading industry.”

While this may sound like an outright, unmitigated disaster, as with most financial meltdowns, there are winners as well as losers here.

The losers, as always, are the little guys:

“hundreds of small trading firms, many of them employing only a handful of people, who will find it expensive, if not impossible, to meet the increased demands for information from banks that have become wary of lending them money.”

This is to say that the big guys like Trafigura Group and Vitol SA will be gaining business lost by their small competitors, shoring up their oligopoly on trading. They not only benefit from increased confidence from finance companies who have become increasingly risk averse in this environment, they also have the capital to adapt to increased operational costs.

And, as usual, less developed countries will bear the brunt of the economic fallout from this sea change. As banks become more risk averse, re-prioritize their business models, and scale down, it’s going to impact small companies in small economies the most just while they are struggling with all of the other economic hardships related to this pandemic. In this case, the big banks truly were too big to fail. The same can’t be said for the little guys.

This is true, of course, for many market sectors, not just commodities trading. Across the world we’re seeing a sweeping consolidation as big companies are able to weather the financial storm of the COVID-19 pandemic and the little ones are folding. Look no further than the main street of your own town: as mom and pop restaurants struggle to make a sale, lines are down the block at the McDonald’s drive thru. As local shops shut down, Amazon becomes ever more of the globalized goliath it already was. 

More than anything, however, the story of Lim Oon Kuin and his bad oil bet is an object lesson in the butterfly effect and outsized might of the all-too opaque trading sector. His will never be a household name, but the impact of his oil gamble will continue to be felt around the world for years to come.

By: Tyler Durden

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Top Oil Companies Invested $9 Billion In Clean Energy Deals Since 2016

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Oil companies, particularly those based in Europe, are among the most active investors in clean energy and technologies.  Six of the top companies have invested about $9 billion in the industry since 2016, according to estimates from the research firm Wood Mackenzie.

For some, including BP, Shell, and Total, the investments are part of a broader strategy to be net-zero emissions companies by 2050. Here’s how much the oil majors have each spent on clean energy since 2016.

For more stories like this, sign up here for our weekly energy newsletter, Power Line.

Big Oil is trying to rebrand itself as Big Energy. And now, many of its constituents can point to more evidence that what they offer does, in fact, extend beyond oil and gas.

On Tuesday, BP revealed a new strategy for how it plans to become a net-zero emissions company by 2050, which included near-term targets. The company is planning to shrink oil and gas production by 40% over the next decade while increasing spending on low-carbon energy.

“We’re pivoting from being an international oil company to an integrated energy company,” Bernard Looney, the company’s chief executive, said Tuesday.

Other European majors including Shell and Total have set similar net-zero emissions goals, though they’ve yet to provide many details. US majors Exxon and Chevron, under less pressure from investors and local policies, have laid out less-ambitious plans to limit emissions.

One measure of a company’s commitment to a cleaner future is investment in clean energy. Here’s how the top companies stack up, according to data from the research firm Wood Mackenzie (Wood Mac).

Related: How to start a real estate business by investing of only 500$

Oil majors invested about $9 billion in clean energy deals since 2016

Wood Mac tracks M&A and VC deals in clean energy for the seven so-called oil majors — Shell, Total, BP, Chevron, Exxon, Eni, and Equinor.

Since 2016, the majors spent just over $9 billion on clean energy, Wood Mac said, not including internal R&D. Exxon was not included in the data provided to Business Insider because it has done little M&A in clean energy, Wood Mac said.

That is not a lot of money. Last year alone, Shell had a capital expenditure budget about three times that, while the budgets of BP, Chevron, and Total were about twice as large.

Total and Shell, which are way out in front, have inked big clean-energy deals in the last four years. In 2019, for example, Shell acquired the energy-storage giant Sonnen through its new energies division.

“Shell is really at the forefront of the transition together with Total,” Valentina Kretzschmar, an analyst at Wood Mac, said. “They have invested across the electricity value chain, and they are really focusing on the power sector and the electricity side of the business.”

While falling near the bottom, US giant Chevron is among the most active investors in carbon capture technologies. Based in San Ramon, California, the firm says………

Read more: Business Insider

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Oil Giant Total Maintains Dividend Despite ‘Exceptional’ 35% Plunge In Profits

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Oil and gas major Total (EPA:FP) posted a massive decline in quarterly profits on Tuesday (May 5) in the wake of historically low crude prices. However, it stopped short of cutting its dividend despite what it described as “exceptional circumstances” due to demand declines caused by the coronavirus or Covid-19 global pandemic.

The French company posted a first quarter net profit decline of 35% to $1.8 billion, down from $2.8 billion recorded over the same quarter last year. Patrick Pouyanne, CEO of Total, said: “The Group is facing exceptional circumstances. The Covid-19 health crisis is affecting the world economy and creating major uncertainties, and the oil market crisis, with the sharp drop in oil prices since March.”

Major crude markets are in temporary lockdowns with factories shut, airlines grounded and people staying at home. Both major oil futures contracts – Brent and WTI – are currently trading 60% lower since the start of the year, with the latter contract registering negative prices on April 20.

Total said its oil and gas production rose by 5% on an annualized basis to 3.09 million barrels of oil equivalent a day (boepd) partly boosted by projects in the UK, Nigeria, Norway and Australia.

However, the company expects production to come in between 2.95–3 million boepd for 2020, a 5% annualized reduction due to curtailment measures in Canada, Organization of the Petroleum Exporting Countries’ (OPEC) exceptional quotas, disruption in Libya and lower demand.

Total will also institute cost cuts across the board with CEO Pouyanne taking a 25% fixed salary pay cut for the remainder of the year. However, the French major stopped short of cutting its dividend, maintaining it at €0.66 ($0.72) per share.

It also proposed an option that shareholders receive 2019’s final dividend in cash or in new shares of the company with a discount, subject to approval at its shareholders’ meeting on May 29.

Total’s decision follows similar moves to maintain dividends by rivals BP, ExxonMobil XOM and Chevron CVX . But Royal Dutch Shell slashed its dividend to shareholders for the first time since World War II on April 30, and Norway’s Equinor did likewise even before the publication of its financials which are due on May 7.

Total also reaffirmed plans to cut its emissions with the objective of being carbon neutral from its operations and energy products in Europe by 2050. The company and the sector as whole is coming under pressure to meet climate objectives.

In April, a group of 11 European investors led by asset manager Meeschaert, currently representing just under 1.5% of Total’s capital, said they planned to present a resolution at the company’s shareholders’ meeting on Paris Climate Agreement commitments.

Follow me on Twitter. Check out my website.

I am a UK-based oil & gas sector analyst and business news editor/writer with over 20 years of experience in the financial and trade press. I have worked on all major media platforms – print, newswire, web and broadcast. At various points in my career, I have been an OPEC, Bank of England and UK Office for National Statistics correspondent. Over the years, I have provided wide-ranging oil & gas sector commentary, including pricing, supply scenarios, E&P infrastructure, corporations’ financials and exploration data. I am a lively commentator on ‘crude’ matters for publications and broadcasting outlets including CNBC Europe, BBC Radio, Asian and Middle Eastern networks, via my own website, Forbes and various other publications. My oil market commentary has a partial supply-side bias based on a belief that the risk premium is often given gratuitous, somewhat convenient, prominence by cheeky souls who handle quite a few paper barrels but have probably never been to a tanker terminal or the receiving end of a pipeline. Yet having done both, I pragmatically accept paper barrels [or should we say ‘e-barrels’] are not going anywhere, anytime soon!

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I’m thrilled to share my complete oil stock portfolio in today’s investing video. Out of my 38 dividend paying stocks, 3 are oil companies. If you have been following my dividend investing channel, you know that I own BP. Today, I’m excited to cover BP and also two other positions never before disclosed on my channel: Chevron (CVX) and Royal Dutch Shell (RDS-A).

Oil Bankruptcies Are Coming: EnergyNet, The EBay Of Oilfields, Is Ready To Profit

Even if he hadn’t been paying attention to Covid-19 news or watching the price of oil ($13.24/bbl today), Chris Atherton, president of EnergyNet, would still be able to foretell the doom ahead for the oil sector just from the phone calls he fields from people looking to sell oilfields on his online platform. Dealing in oil and gas operations, royalty interests, undeveloped acreage, and more —it’s like Ebay, for oilfields.

A year ago, Atherton, 43, was getting a lot of calls from companies eager to divest non-core assets and clean up their balance sheets. Back then, with oil prices at $60, the interests they sold went for an average price of $42,000 per net flowing barrel per day (thus a 100 bbl per day field costs about $4.2 million). As 2019 went on, buyers got more picky, and sellers more desperate. A lot of undrilled acreage didn’t sell at all.

In late February, the calls began drying up. As the Corona-crisis hit and oil prices went into freefall, companies yanked listings. “It’s on pause,” says Atherton. “When you have big fluctuations in volatility, the asset divestitures market seizes up.” That’s especially the case with management teams who have accepted the end is nigh and are determined not to be second-guessed in court.

For how long depends on prices. That per-flowing-barrel valuation has plunged with the price of crude, to less than $20,000 in the 40 or so deals that EnergyNet transacted in March and April. As badly as companies would like to jettison assets, “if there’s negative oil prices, a prudent judge will delay a sale.”

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Atherton’s incoming calls now are from restructuring teams wanting to prep EnergyNet. “The wave is coming.”

Atherton, ex-Enron, joined EnergyNet soon after its founding in 1999, about the same time, he says, as the launches of Socks.com and AskJeeves. Competitors have come and gone, leaving EnergyNet to sell 200,000 properties over 20 years, for $6.8 billion. Atherton says that EnergyNet have verified that today’s 40,000 registered users have access to $17 billion worth of dry powder ready to make deals.

“If it’s any silver lining, there’s lots of buyers.” Their killer app: digitization of every bit of available information about an asset and its neighborhood. “We show all the production nearby. It contextualizes the value, like Redfin or Zillow,” says Atherton. In the past two years EnergyNet has transacted more than $5 billion in properties, taking a cut of 2-3% on every sale), including post-bankruptcy sales for the likes of Samson Resources, Linn Energy, EnerVest, Swift Energy and Sanchez Energy.

Atherton has watched the evolution of the shale revolution, and has marveled at the undying optimism of drilling engineers. He has in recent years collected screen shots of favorite pages from oil company investor presentations, which show cross sections of reservoir rock pierced by as many as 40 wells per square mile — a vision of efficiently mass producing oil that has never lived up to the hype. Did they really think it could work? “I don’t think it was nefarious or fraudulent,” says Atherton, just overly optimistic.

The big banks are now standing up teams to deal with assets — essentially in-house oil companies. Some specialize in it, like BOK Financial, controlled by Oklahoma oil billionaire George Kaiser. But it’s generally not something they want to do, says Georgetown University Prof. Reena Aggarwal. Oil adds a lot of risk to banks balance sheets, especially assets that weren’t good enough to keep companies out of bankruptcy in the first place. Banks want oilfields off their books, but don’t want to crystallize losses. So they hold, and wait.

This down cycle won’t end without some marquis names going into Chapter 11. Before Covid-19 many bankers considered Chesapeake “too big to fail” with access to ample capital to keep limping along. Now the opinion has changed. With $9.4 billion in debt requiring $650 million in annual interest payments, and operating income set to get cut in half this year, Chesapeake has limited runway left. Its equity market cap is down to $300 million, while Chesapeake bonds maturing February 2021 traded Tuesday at 7.75 cents on the dollar (down from 95 cents in early January) according to FINRA data — as if holders anticipate a total loss. “If they don’t do a voluntary restructuring at some point, they will not be well positioned when the industry turns around,” says a consultant who advises banks on oil assets.

Indeed, when the industry turns around, there will be some surprises waiting for them down in those oil reservoirs. With Covid-19 lockdown evaporating 40% of gasoline demand, storage tanks in the U.S. will hit “tank tops” within weeks. With no place to stick their crude — at any price — producers have begun the labor-intensive process of shutting-in their wells. Already billionaire Harold Hamm’s Continental Resources has shut in all of its roughly 200,000 barrels per day of production in North Dakota, and declared force majeure, refusing to sell contracted oil to pipelines at negative prices.

It’s not like turning a water faucet on and off. “Shut-ins are not easy decisions. When production shuts-in, problems arise. Multi-phase well flows begin to separate out, while problematic hydrates, waxes, asphaltenes form which will have serious economic implications,” noted analyst Bob Bracket of Bernstein Research last week, sharing numerous examples of fields around the world that were flowing more than 1,000 barrels per day before being shut-in due to low prices — then never started up again. This is a frightful proposition when buyers value oilfields based on how many barrels of oil they flow per day. Uncertainty can be expensive. A shut-in field might only sell for half the price of an otherwise identical one still flowing healthily, says Atherton.

But how low can prices go? Last week a few dozen prompt month futures contracts for West Texas Intermediate crude traded below -$30 per barrel — meaning that sellers are paying buyers to take their oil away because they have nowhere to store it. Likewise, oilfields can sell for “negative” value because of the size of their attendant liabilities tied to plugging wells and remediating land. Atherton says that although EnergyNet usually makes its commission off of auction proceeds, they’re now able to sell these negative-priced assets by accepting a success fee.

One company with huge potential remediation costs that has analysts concerned is California Resources Corp., which was spun out by Occidental Resources in 2014 to take Oxy’s giant old California oilfields, and loaded up with debt, including more than $4 billion due by the end of 2022. CRC’s average all-in cost per barrel, including $19 in cash operating costs, $8 in interest, and $5 in overhead (per Bernstein), adds up more than $35 per barrel — too high for current oil prices.

Yet CRC can’t easily shut in its operations, many of which rely on continuous injection of steam down into reservoirs to coax stubborn oil out. Add low oil prices to California politics and CRC might soon be unable to stay in business. “Sometimes it feels like I’m watching a comedy, sometimes a tragedy, but increasingly it’s a horror story,” says Clark Williams-Derry with IEEFA. CRC’s 8% bonds maturing in December 2022 changed hands in January at 45 cents on the dollar, according to FINRA data. Last trade on Tuesday was at 1.62 cents.

It seems fitting that California’s oil-rich San Joaquin Valley was the setting of the best oil movie ever: Daniel Day Lewis’s There Will Be Blood.

Too soon to tell, but Atherton expects that in a year or so, oil company bleeding will turn into a flood of assets available on EnergyNet, bringing buying bonanza not just for private equity types, but for any accredited investor who ever dreamed of owning a slice of oilfield. If you’d prefer to stick with stocks, analyst Bob Brackett at Bernstein suggests that the most action (and risk of bankruptcy) will be in those thinly valued equity issues balanced atop mountains of debt, and suggests that dedicated bottomfeeders could take a flyer on the biggest losers so far, including Whiting Petroleum, Centennial Resource Development, QEP, Chesapeake, Callon Petroleum, Denbury Resources, Extraction Oil & Gas, Laredo Petroleum, Chaparral Energy and California Resources — keeping in mind that some will be a total loss. Brackett’s preferred oil producers, still near record lows, but considerably safer, include ConocoPhillips, Hess, EOG Resources, Apache, Concho Resources and Pioneer Natural Resources.

Atherton and his partners realized coming out of the 2016 oil recession that EnergyNet’s fate was a little too closely tied to the oil industry. So they’ve been working to diversify their platform and now are providing an exchange for 23 commodities, including helium, geothermal, surface rights for wind and solar, and even timber. They know well how tough it is to break into a new business: timber people ignored their listings, until Atherton ordered his team to build a new entryway, called Timber Online. It worked. “It’s a perception thing,” he says. “Now they think we do it all the time.” Just a little insurance, in case this oil thing doesn’t work out.

For more on EnergyNet, check out my 2016 story:

MORE FROM FORBESLike Ebay For Oilfields, EnergyNet Booms As Oil Busts

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Source: Oil Bankruptcies Are Coming: EnergyNet, The EBay Of Oilfields, Is Ready To Profit

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Former BP CEO John Browne joins “Power Lunch” to discuss the future of energy, Brexit and more

The U.S. Oil ETF, USO, Is The Culprit Behind Oil’s Massive Plunge

Watching the May contract for oil futures this morning, I was shocked at the amount of coverage given to “oil’s plunge” Monday morning.  That may be because I watch the May 2021 WTI futures contract, which has fallen $0.18 per barrel to $35.34 in early Monday trading, not the May 2020 contract which has fallen an astounding $7.42 (more than 40%) to $10.84 per barrel and drawn all the headlines.

The culprit here is obvious.  The United States Oil ETF, USO.

According to Bloomberg, USO owned 25% of the outstanding volume of May WTI oil futures contracts as of last week.  With that contract set to expire Tuesday, the buyers of that “paper oil” have to sell or take physical delivery at the end of May. ETFs like USO are not created to take physical delivery of the oil contracts they hold, so in a long squeeze, the fund’s managers—USO’s general partner/sponsor is U.S. Commodity Funds, LLC (USCF) and, according to an 8-K filed on March 30th, the administration of USO will transition from Brown Brothers Harriman to Bank of New York Mellon, although it is unclear whether that change has been fully implemented—have to dump oil.

Regardless of who is doing the selling, front-month futures prices have dropped more than 40% today.  The June contract has also fallen, to be sure, but by a much lower degree (it is now down $2.37/barrel to $22.36.) That decline might be expected in the throes of the worst pandemic to have hit planet Earth in the past 100 years. There is no economic outcome that could possibly justify single-digit prices for oil, though, and USO‘s implosion has put the benchmark WTI crude oil futures contract on the precipice of that benchmark today.

So, as I noted about the now-defunct XIV, ETF in this Forbes column, USO works until it doesn’t work.  Today it is clearly not working.

The solution here is for USO’s fund administrators to dissolve it, as happened with XIV.  Those administrators made a minute change in the fund’s composition last week—shifting holdings to the second- and third-month contracts instead of fully rolling over from the front-month contract to the second-month contract two weeks prior to expiration——but that was merely the proverbial shifting of the deck chairs on the Titanic.  USO has outlived its usefulness, if it ever had any.

The sad thing about the trend toward ETFs is the human economic toll that can be caused by exaggerated price swings.  The U.S. oil rig count fell by 11%—the largest weekly decrease in recent memory—in last week’s Baker Hughes BHI count. None of my oilpatch contacts is telling me this morning that this is the bottom, either.  Roughnecks and rig workers are losing their jobs so that USCF, Bank of New York, and the fund’s distributor, ALPS, can earn their fees on USO.

How does this end?  Well, COVID-19 has brought to the fore economic possibilities that would have seemed outrageous six months ago. In my other writing platforms I have mentioned the possibility that the Fed could start buying USO.  As the Fed’s current buying remit includes bond ETFs, LQD (high-grade) and HYG (high-yield,) I see no barrier to the Fed buying another ETF.

Aside from even more government overreach, though, the solution to low oil prices is, as they say in Houston, low oil prices.  As marginal U.S oil production drops to zero and production curtailments by OPEC+ hit the markets, oil will once again become a scarce good as global economies begin to recover from COVID-19 lockdowns in the second half of 2020.  Companies that store oil on a temporary basis are thus the huge winners here.

As I have noted in prior Forbes columns, my firm, Excelsior Capital Partners, has enormous proportional exposure to the oil tanker industry via holdings in Nordic American Tankers, Navios Maritime Acquisition and Tsakos Energy Partners.

There will be a day when arbitrageurs look at the act of renting a VLCC oil tanker solely to serve as an oversized storage closet as an act of folly.  Thanks to USO and the enormous amount of contango (intermediate-term contracts are worth much more than near-term ones) in the oil futures curve caused by the implosion of USO, today is not that day.

Tomorrow sees a new day for oil traders as the May WTI futures contract expires.  Anyone who thinks that today’s plunge in the price of the front-month oil futures contract can’t happen again is solely misleading herself, though.  So, I will keep owning companies that have scarce products (oil tankers) that offer energy traders the optionality to play the extreme distortions in the commodities futures curve caused by ETFs like USO.

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I have researched stocks for 27 years, starting fresh out of college at Lehman Brothers and then moving to Donaldson, Lufkin and Jenrette. At DLJ I was a Senior Analyst following US auto parts companies before relocating to London to originate DLJ’s European Automotive coverage and then moving to UBS. I had a decade of sell-side experience, attaining the CFA designation. After years of growing my own portfolio, I founded Portfolio Guru LLC three years ago. I construct portfolios for my clients on a fee-only, separately-managed basis and write about small stocks in my newsletter, MicroCap Guru. My work is also featured on Real Money, the premium portal of TheStreet.com. The Sanskrit root of “Guru” combines “dispel” and “darkness.” I invest solely for individuals, and for them I try to dispel the darkness that emanates from Wall Street. My friends enjoy poking fun at my nom de stock, and when I am not Guru-ing, I enjoy spending time with them, outdoor activities, and sampling NYC. I can be reached at jim@excap.biz

Source: The U.S. Oil ETF, USO, Is The Culprit Behind Oil’s Massive Plunge

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CNBC’s Bob Pisani breaks down the action in the oil exchange-trade funds. Something that’s never happened in the oil market is happening today: Negative prices for oil contracts. While many people may see this and think the overall price of oil is negative, there’s nuance. The short answer is that no, not all oil is free. The picture in the market is not as bleak as this eye-popping headline would suggest. Futures contracts are tied to a specific delivery date. Toward the end of a contract’s expiration date, the price typically converges with the physical price of oil as the final buyers of these contracts are entities like refineries or airlines that are going to take actual physical delivery of the oil.
Futures contracts ultimately are contracts for physical delivery of the underlying commodity or security. While some people in the market speculate on the contracts, others are buying and selling because they have use for the commodity itself. Near the contract’s expiration, traders just start buying the next month’s futures contract. Those who stay in the position to the final day are typically buying the physical commodity, such as a refiner. The contract that fell more than 100% on Monday is for May delivery, and it expires on Tuesday.
With the coronavirus pandemic leading to unprecedented demand loss, and with storage tanks quickly filling up, there is no demand for this oil contract expiring Tuesday. That’s why it turned negative, meaning producers would pay to get this oil off their hands because there is no one that needs that oil this week with the country shutdown. Futures contracts trade by the month. The contract for June delivery traded 16% lower at $21.04 per barrel. So after that contract expires on Tuesday, oil will be back above $20. The U.S. Oil Fund, which tracks the price of various futures on oil, fell just 10%. Trading volume was also relatively thin in the May contract.
According to data from the CME Group, volume stood at roughly 126,400. By comparison volume for the June contract was nearly 800,000. Again Capital’s John Kilduff attributed the plunge in the May contract to the fact that “the physical oil market conditions are a disaster, with growing concerns about finding available storage.” Longer-term, he said the picture looks brighter. “The higher priced, longer-dated futures contracts are indicative that of the market expecting some level of clearing in the cash market over the course of the next several months,” he told CNBC. “Given the rapid decline in the U.S. oil rig count and the expected cutback by OPEC+ members that is a reasonable assumption.” That said, he noted that as the subsequent contracts reach expiration, they could engage in their own “death march down towards the super-low cash prices.” For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2JdMwO7 » Subscribe to CNBC TV: https://cnb.cx/SubscribeCNBCtelevision » Subscribe to CNBC: https://cnb.cx/SubscribeCNBC » Subscribe to CNBC Classic: https://cnb.cx/SubscribeCNBCclassic Turn to CNBC TV for the latest stock market news and analysis. From market futures to live price updates CNBC is the leader in business news worldwide. Connect with CNBC News Online Get the latest news: http://www.cnbc.com/ Follow CNBC on LinkedIn: https://cnb.cx/LinkedInCNBC Follow CNBC News on Facebook: https://cnb.cx/LikeCNBC Follow CNBC News on Twitter: https://cnb.cx/FollowCNBC Follow CNBC News on Instagram: https://cnb.cx/InstagramCNBC #CNBC #CNBC TV

Stock Market Bloodbath: S&P, Dow Down More Than 7% In Worst Drop Since 2008

Topline: A surprise price war between oil producers Saudi Arabia and Russia, compounded by intense investor anxiety over the continued spread of the coronavirus, triggered massive market losses on Monday.

  • The Dow Jones Industrial Average lost 7.8%, or 2,014 points, the S&P 500 lost 7.6%, and the Nasdaq Composite lost 7.3%.
  • Early losses of 7% for the S&P 500 triggered the market’s circuit breaker mechanism, which halts trading for 15 minutes to prevent stocks from free-falling and give investors a chance to reassess.
  • The yield on the 10-Year U.S. Treasury bond plummeted to below 0.4%, signaling that investors are continuing to flee risky assets like stocks in favor of safer ones like bonds and gold.
  • Oil prices plummeted by more 20% during the day, seeing their worst drop since the Gulf War in 1991; the financial services sector also suffered, with shares of JPMorgan down nearly 13% and the Financial Select Sector ETF falling 10%.
  • Shares of Clorox hit a new 52-week high of $177 per share on Monday as investors flocked to the producer of cleaning products and disinfectants.

Key background: Over the weekend, Saudi Arabia—the world’s largest oil exporter—slashed its prices to levels not seen in 30 years after it could not convince Russia to agree to production cuts. The 14 members of OPEC (the Organization of the Petroleum Exporting Countries) along with some non-members, including Russia, met last week to discuss how to respond to the lagging demand caused by the spreading coronavirus. After negotiations fell apart, Saudi Aramco, the Saudi state-owned oil company, said it will offer major discounts in order to win over buyers. It’s planning to boost production to more than 10 million barrels a day and has even told some market participants that it could raise production to a record 12 million barrels a day, Bloomberg reports. Oil prices had lost more than 30% by Monday morning in response to the sudden supply shock.

Tangent: Shares of the world’s largest oil producers like BP and Royal Dutch Shell plummeted alongside global markets on Monday. Shares of BP dropped 19.2% to $25.25 on Monday— that translates to more than $20 billion in lost market value since the close of markets on Friday, and Royal Dutch Shell dropped 15.2% to $18.00 per share—that’s $25 billion in value lost.

Chief critic: President Donald Trump weighed in on Twitter about the market’s drop on Monday morning, writing, “Saudi Arabia and Russia are arguing over the price and flow of oil. That, and the Fake News, is the reason for the market drop!”

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Source: Stock Market Bloodbath: S&P, Dow Down More Than 7% In Worst Drop Since 2008

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John Kilduff, CNBC contributor specializing in energy trading, talks with Rachel Maddow about the dynamic between Saudi Arabia and Russia that has caused the price of oil to drop precipitously and clobbered a stock market already crippled by coronavirus concerns. Aired on 3/9/2020. » Subscribe to MSNBC: http://on.msnbc.com/SubscribeTomsnbc MSNBC delivers breaking news, in-depth analysis of politics headlines, as well as commentary and informed perspectives. Find video clips and segments from The Rachel Maddow Show, Morning Joe, Meet the Press Daily, The Beat with Ari Melber, Deadline: White House with Nicolle Wallace, Hardball, All In, Last Word, 11th Hour, and more. Connect with MSNBC Online Visit msnbc.com: http://on.msnbc.com/Readmsnbc Subscribe to MSNBC Newsletter: http://MSNBC.com/NewslettersYouTube Find MSNBC on Facebook: http://on.msnbc.com/Likemsnbc Follow MSNBC on Twitter: http://on.msnbc.com/Followmsnbc Follow MSNBC on Instagram: http://on.msnbc.com/Instamsnbc Saudi Arabia Seizes Oil Market By The Throat; Stock Market Shokes | Rachel Maddow | MSNBC

Global Markets Plunge Over Coronavirus And Oil Price War Fears

Topline: Global stocks plunged after crude oil posted its biggest fall since the 1991 Gulf War after Saudi Arabia launched a price war with Russia.

  • Japan’s Nikkei index fell more than 5% on Monday, while stocks in Hong Kong and mainland China were also down as panicked investors in Asia flocked to safe-haven assets like government bonds and the Japanese yen.
  • European stocks followed suit, with London’s FTSE 100 index down almost 8% on Monday morning, France’s CAC 40 more than 7% and Germany’s DAX 6%.
  • The pan-European Euro Stoxx 50, measuring the Continent’s 50 largest companies, plunged more than 6% on Monday morning, its worst performance in more than a year.
  • U.S. futures were sharply down, with S&P 500 futures down more than 5%.
  • Oil prices plummeted with the benchmark Brent crude down to $33.20 a barrel, while West Texas Intermediate fell 31%, to $28.32 a barrel on Sunday.
  • The steep drop was triggered after Saudi Arabia announced it would raise production after OPEC’s deal with Russia to supply collapsed on Friday.

Big number: Some $90 billion ($140 billion AUD) was wiped off Australia’s markets on Monday, with the benchmark ASX falling more than 7%—its worst performance since the global financial crash.

What to watch for: Oil prices could drop to a low of $20 a barrel, Goldman Sachs analysts warned on Sunday, if the coronavirus continues to spread and the oil price war intensifies.

Key background: Global markets have posted some of their steepest falls since the 2008-2011 financial crisis with panicked moves from investors spooked by the potential impact of the coronavirus on the global economy, and an oil price war. The Federal Reserve’s emergency rate on March 3, 2020, provided a momentary confidence boost for the markets, which now will look for coordinated action from the G7 club of advanced economies to underpin the global economy.

Tangent: Some 110,000 people globally have been infected with Covid-19 to date, but as of Monday the number of new cases in China, where the pneumonia-like virus was detected, appear to be falling, while cases around the world continue to prompt strict quarantine measures, particularly in Italy, now the largest cluster of Covid-19-related deaths outside China.

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I am a breaking news reporter for Forbes in London, covering Europe and the U.S. Previously I was a news reporter for HuffPost UK, the Press Association and a night reporter at the Guardian. I studied Social Anthropology at the London School of Economics, where I was a writer and editor for one of the university’s global affairs magazines, the London Globalist. That led me to Goldsmiths, University of London, where I completed my M.A. in Journalism. Got a story? Get in touch at isabel.togoh@forbes.com, or follow me on Twitter @bissieness. I look forward to hearing from you.

Source: Global Markets Plunge Over Coronavirus And Oil Price War Fears

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The economic consequences of the coronavirus epidemic have sparked a conflict among major oil-producing nations. Last week, oil producers were unable to agree on a reduction in production volumes, resulting in a price war between OPEC and Russia. That has sent oil prices plummeting. The price of oil collapsed by 31.5 percent at the start of trading, the lowest price since January 1991. As a reaction, stock markets fell sharply this Monday: In Tokyo, the Nikkei Index lost more than 5 percent, while the Hang Seng in Hong Kong fell almost 4 percent. Australia’s ASX Index fell particularly hard with a minus of 7.3 percent and in Germany, the DAX tumbled almost 8 percent at the start of trading. The picture around the Gulf is even more dramatic – markets have shed up to around 10% there. Subscribe: https://www.youtube.com/user/deutsche… For more news go to: http://www.dw.com/en/ Follow DW on social media: ►Facebook: https://www.facebook.com/deutschewell… ►Twitter: https://twitter.com/dwnews ►Instagram: https://www.instagram.com/dw_stories/ Für Videos in deutscher Sprache besuchen Sie: https://www.youtube.com/channel/deuts… #Coronavirus #StockMarket #Economy

Abu Dubai National Oil Company to Use Blockchain For Oil Tracking

https://www.pivot.one/share/post/5c0f63aa016de74a9689d75a?uid=5bd49f297d5fe7538e6111b6&invite_code=JTOJYV

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