
The global oil market is broken, drowning in crude nobody needs - fabrika
https://www.bloomberg.com/news/articles/2020-03-29/the-global-oil-market-is-broken-drowning-in-crude-nobody-needs
======
axus
The market is broken because demand is way down, but production isn't being
lowered to match. Saudi Arabia intends to keep their production high. The
other producers are losing money but haven't reduced output, because changing
output levels is more expensive than taking the loss.

~~~
ptero
This does indicate market inefficiencies, but such tactics -- flooding the
market with cheap products to kill competition, then raising prices back -- is
pretty common. I have seen it everywhere from cell phone marketing to grocery
stores. I have personally seen, twice, Stop and Shop moving in, dropping
prices, driving a less-well-funded competitor out, then going back to business
as usual.

I do not see that the current tussle of oil producers indicates that the
market is broken. Suboptimal, sure, but not broken. My 2c.

~~~
vikramkr
That depends on what you define as a market that isn't broken. In a perfect
free market the oil producers make zero profits and this is a move towards
fixing the market

~~~
wernercd
"in a perfect market producers make zero profits"

In what world would any company make zero profits in a "perfect" sense?

Companies exist to make profit...

~~~
savanaly
You're thinking of accounting profit, the person you're replying to was
thinking of economic profit.

[https://www.investopedia.com/ask/answers/033015/what-
differe...](https://www.investopedia.com/ask/answers/033015/what-difference-
between-economic-profit-and-accounting-profit.asp)

------
tech-historian
I love the different names for various types of oil: sweet, sour, light, etc.
As if it was edible.

Description of the names:

[https://en.m.wikipedia.org/wiki/Sweet_crude_oil](https://en.m.wikipedia.org/wiki/Sweet_crude_oil)

[https://www.thebalance.com/the-basics-of-crude-oil-
classific...](https://www.thebalance.com/the-basics-of-crude-oil-
classification-1182570)

~~~
wyxuan
I mean in the old days, they did try to distinguish then by tasting them

~~~
crazygringo
I thought you were joking but that's actually what the first link says!

"Nineteenth-century prospectors would taste and smell small quantities of oil
to determine its quality."

Thanks, TIL.

------
a3n
I'm a truck driver, been in the LA area a few days. It's surprising how large
the area looks without oppressive smog and haze, and how sharp and detailed
the hills and mountains have become.

For what that's worth.

~~~
jayd16
The city is a bit taller now. Twenty to thirty years ago you could see even
further (although only just after rain cleared up the pollution).

------
csours
It's easy to say "we live in a Just-In-Time Economy", but it's things like
this that really demonstrate the implications.

The supply chain is set up to flow, so when demand drops or spikes up you get
a flood or a shortage.

If there's a flood, some companies will go out of business, leaving the
survivors with a bigger slice of the pie.

If there's a shortage, companies will respond, and some will over-react and
build over-capacity and then fail when the shortage evens out, leaving the
survivors with a bigger slice of the pie. I think this may happen with
ventilator companies. After this event, there may be an over-supply of
ventilators, leading to failure of some companies or lines of business.

~~~
tomp
That's mostly because politicians are stupid.

This exact scenario has happened before, with masks (I think during SARS?
there was an article on HN recently) - companies were ordered to produce more,
then the crisis fizzled out and the orders were cancelled, making some
companies almost go out of business.

Instead, politicians should simply commit to buying said quantities of
widgets, and then respect those commitments regardless of the outcomes
(widgets are needed or not at all). It's unfair (and sets a bad precedent) to
expect companies to take the loss for public good.

~~~
csours
I think that's right. I think most politicians don't care or understand, and
the ones that do have a hard time explaining things like this to their
constituents.

------
lottin
Demand for oil drops, prices fall, stocks pile up, production scales down.
There is nothing broken here. This is exactly how a market-based economy
works.

------
kumarski
There are approximately 7500 crude tankers on planet earth.

I bought and sold tanker stocks based on the following:

IMO 2020 regulatory retrofits.

Coronavirus

Saudi Russian Oil Price War

Shipyard Shutdowns

My next bet is going to be based on the drawdown in US Oil operations. I'm
gambling on $FCG based on the notion that the price of natural gas will go up
a bit because the associated gas from oil wells is no longer in play.

Right now, the volatility is a gambler's paradise.

~~~
christophilus
Same. What tankers do you own? I’m looking at STNG.

~~~
kumarski
$DHT $FRO

~~~
kumarski
Be careful.

I'm comfortable losing it all.

I know I'm in the blast radius of volatility.

------
chiefalchemist
The upside is - damange to the environment aside - oil is a universal
currency. Lowing the cost of energy is like printing money and mailing
everyone a cheque; without the inflation. (It's also why oil is has been used
as an economic weapon). Lowing the cost of energy impacts everyone. It's like
being The Fed and lowing interest rates, but better since Joe & Jane Q Public
benefit every time they pull up to the pump.

This is the same reason the Obama administration did little to discourage
fracking from hockey stick'ing. Given the state of the economy was one of the
few tools they had to goose the economy. Essentially, like it or not, selling
out Mother Nature for the economy.

[https://www.forbes.com/sites/rrapier/2016/01/15/president-
ob...](https://www.forbes.com/sites/rrapier/2016/01/15/president-obamas-
petroleum-legacy/#4cfd5637c10f)

~~~
vikramkr
Fracking is also better for carbon emissions and helped price out coal, which
is a huge environmental benefit. Nothing is black and white

~~~
chiefalchemist
Yes and no - but perhaps mostly no. Let me explain, please.

Coal was a fraction of market share. It was on its way out regardless.
However, a lower oil price increases consumption across the board. Thus it
wouldn't take much increase for oil's aggregate pollution to exceed oil +
coal.

Yes maybe on a per kilowatt basis oil is better than coal. But given the usage
of oil, that is the scale, the price drop triggered increases in consumption
could in fact cover and then exceed the gain from less coal.

------
9nGQluzmnq3M
Serious question: how do I invest in some of those $10 barrels of oil? It
seems like a contract to deliver oil at $10 in 2021 is likely to be worth more
than by next year.

~~~
Arnt
The $10 barrels are for delivery now, not next year.

If you can store the oil you can earn a lot of money now. But most people
can't store much oil, compared to the volumes that are being pumped out of the
ground. And for many of the producers, slowing down production by more than a
few per cent is also difficult — once you turn off the tap you don't really
know whether the oil is going to start flowing again later. So the effect is a
_steep_ price fall.

~~~
throwaway_pdp09
> once you turn off the tap you don't really know whether the oil is going to
> start flowing again later

You mean it can actually physically stop if the flow from the ground is
blocked for a while? Can you expand if possible.

Edit: I understand it comes out of the ground quite hot (I've heard of 200 C)
and if it flows into cool pipes and stays still maybe it would 'congeal'.

~~~
stoneman24
While there can be a great deal of pressure pushing the oil up the well, there
is also resistance to that flow up a narrow pipe (perhaps 4 inch pipe). The
balance of forces can be very close but the momentum can keep the flow going.
In some fluids, there can be methyl hydrates (or wax) that can cause problems
with maintaining flow. There can also be particles that are moving in the
fluid (sand), slowing or stopping the flow can cause these particles to
settle, preventing future fluid movements. There is a temperature and pressure
gradient which can allow dissolved gas to bubble out the fluid as it ascends
the well which can lead to added complexity. And we haven’t yet discussed oil
recovery methods like gas/water injection or electrical sub surface pumps.
Getting a well restarted after shutdown, may not be possible. I worked with
some petroleum engineers, getting the best from your wells can be a very
complex simulation problem followed by expensive engineering solution.

~~~
Arnt
Oh, so it's a matter of the well itself too, not just of its surroundings?
TIL.

~~~
stoneman24
Yes, and also to agree with Arnt (sibling comment), there can also be effects
between neighbouring wells. In some fields, the fluid/gas can move easily
(wells will affect each over) in others, there is little ability for movement.
The fracking that engineers do attempts to add additional channels for the
fluid/gas to move. So trying to turn down one well can lead to other effects.
And in changing the situation, there will transients which will decrease over
time.

------
fulafel
Markets are broken when oil usage develops towards sustainable levels?

We have to drastically cut down oil use, let's not pretend that the pre-corona
oil consumption was tolerable, much less desireable.

Now would be a good opportunity make internaltional agreements to cap oil
consumption and extraction to its current level in shutdown, and when the
shutdown starts to get rolled back, the shock will be smaller as rising demand
and price mechanisms reconcile how the remaining lower oil supply gets used.

~~~
mrfusion
I hate to disagree but the free market is often a great guide to tell us how
much we need of something. The USSR tried telling industries how much to
produce each year and we can agree that didn’t turn out well.

Of course oil is a problem but a tax or cap and trade system would make more
sense to address it.

~~~
fulafel
In economics there is a wide consensus that the free market is a lousy guide
when it comes to incorporating externalities like accelerating climate change
causing millions of unnecessary deaths vs perceived need to drive around in
gas guzzlers.

Taxes and cap-and-trade systems are indeed the mechanisms of how current
international agreements try to attempt CO2 emissions, they're a fine way to
implement it.

~~~
ehvatum
It was my understanding that by driving around in a gas guzzler, I am
precipitating human extinction, bringing forward the long-awaited day when the
ecology of Earth no longer includes humans, which will be “better”.

Where did I go wrong? Was it when I evolved?

------
gregorymichael
What happened to "Peak Oil"? Was there some assumption in those projections
that proved to be wrong?

~~~
wazoox
Peak Oil (conventional) happened in 2008 (see World Energy Outlook 2018 from
the IEA). Tight oil came to the rescue. Tight oil and shale oil industries are
all built on a huge amount of debt and never were cash-positive in the past 12
years. That's the part that wasn't anticipated.

However shale oil requires constant drilling because production rises then
falls very quickly (18 months to 2 years). With low oil prices, drilling will
dry out and oil will dry out soon, too. Plus total oil production
(conventional + non conventional) will probably peak anyway in the next decade
(see WEO 2018, once again), and this may be quickened by the coming lack of
investment due to low oil prices.

What could happen? With low demand and low price, the non conventional oil
industry is deemed to go bankrupt, and the US banks will have to part with
trillions of debt. That won't be pretty. Until this industry is rescued and
starts pumping again, there could be a severe crunch of oil production,
initiating an oil shock and a huge recession, sometimes in the coming next few
years.

~~~
perl4ever
"However shale oil requires constant drilling because production rises then
falls very quickly"

You seem to interpret this as a problem. However, I've read many times that
it's basically a _solution_ , because what it means is that production is
responsive to demand in a far shorter timeframe than conventional oil. On top
of that, supposedly you can drill a well and not complete it until a price war
is over.

So I'm not sure why you think "non conventional oil industry is [doomed] to go
bankrupt" when not only do people in the industry say it is relatively easy
and cheap to put resources on hold, but obviously the sources of conventional
cheap oil tried their best to kill the newcomers and failed, only a few years
ago. According to both theory and recent history, your prediction doesn't make
sense to me.

However, I have no experience whatsoever in the industry, so maybe you have
some expertise?

~~~
wazoox
Yes, currently the tight oil industry _could be_ in a good shape, because
drilling a well is very cheap (about US$ 5 millions), without the trillions of
debts it amassed. The problem may unroll like this:

\- demand is destroyed by coronavirus \- prices go down (maybe as low as $10 a
barrel according to some analysts) \- existing wells maybe kept pumping, or
not \- new drilling stops, ditto exploration, etc. \- cash flow in tight oil
industry falls to about zero \- huge debt (trillions) can't be paid back,
companies go belly up, banks must be rescued by the Fed...

several scenarii open up from there: would the Fed rescue the oil companies?
may the government nationalise the oil industry? What can be the impact on
US$? On US debt? financial markets? Who knows, all bets are off at this point.

The crucial moment will be there: in the few months between this moment when
the shale oil industry defaults on its debt, and when it's bought back (debt
free, therefore in a sane situation), there may be a large gap in production,
that could kill world oil demand by sending prices through the ceiling ($100
barrel? $120? $150?) because normal demand _can 't_ be fulfilled by
conventional production anymore.

Lots of graphs here: [https://jancovici.com/en/energy-transition/oil/when-
does-the...](https://jancovici.com/en/energy-transition/oil/when-does-the-
world-oil-production-peak/)

I myself have no particular expertise, but I've been following quite closely
oil and energy since 2005.

------
Synaesthesia
Keeping oil prices low punishes not only Russia but Iran and Venezuela, so
that could be a major reason why the Saudis are flooding the market.

~~~
mardifoufs
Saudi arabia still need a barrel price of 80$ to keep their budget balanced.
They have also mostly eaten through their reserves and are economically 100%
oil dependant. Yeah it costs them only 2-3$ to get the oil from the ground but
Saudi Arabia is basically just a huge welfare state and a kleptocracy for it's
ridiculous number of princes and royal family members.

Russia has more flexibility imo and can cope a lot better with low oil prices,
but Iran will probably see an even bigger economic collapse since they were
already selling at a steep discount to offset trade sanctions.

Venezuela was also selling at really low prices and couldn't even afford to
keep It's oil infrastructure from collapsing at 50$/barrel so I have no idea
how they will avoid total economic destruction soon. Maduro won't be able to
pay off the army for long now

So they are all going to be badly hurt, I don't see how saudi arabia can
afford prices these low for long. They can't do like they did in the past and
just drive everyone else from the market by crashing prices at will.

------
Waterluvian
Despite Canada's dollar doing terribly, gas stations are selling it for
$0.64/Litre where I live.

I haven't seen it this low in maybe 20 years.

~~~
mardifoufs
That's because Canadian oil is _way_ cheaper than the 2 benchmark crude grades
right now! Western Canadian Select is at 7.2$ a barrel compared to 21$/barrel
for the WTI. In fact, the oil itself is probably worth 0 (or less) since some
sand oil producers are literally paying to get rid of their crude.

It's hard to sell even sweet oils right now, so heavy blends that have little
access to international markets like the Western Select are especially hurt by
this enormous supply glut.

------
JimTheMan
The oil isn't just magically coming from some unstoppable font.

They're going to have to bite the bullet and shut some wells. They say as much
at the bottom of the article. It's not like we haven't had oil downturns
before...

------
ufo
I find it odd that the article does not mention the oil price war between
Saudi Arabia and Russia.

[https://www.reuters.com/article/us-opec-oil-policies-
idUSKBN...](https://www.reuters.com/article/us-opec-oil-policies-
idUSKBN20W21S)

~~~
diminish
is the price war the reason, the consequence or the accelerator of the current
market?

~~~
toomuchtodo
The price war was unintentionally started just as demand began to be wholesale
destroyed by the response to the COVID pandemic. Supply was reduced, but
demand was reduced even more by a halting of the global economy.

Saudia Arabia was trying to bring Russia in line with OPEC+ price targets, but
Russia has enough state cash reserves and a much lower state budget break even
point (~$40/barrel vs Saudi Arabia's ~$80/barrel), so here we are.

~~~
wyxuan
Saudi Arabia has a much lower break even point: around 20 dollars. Hell even
deepwater only costs 80 dollars to break even.

~~~
toomuchtodo
For production, not supporting their generous benefits to their citizens.
They’re going to burn up their state reserves on the gravy train.

------
olivermarks
The idea of supertankers storing 100 million barrels of oil at sea is an
environmental catastrophe waiting to happen, especially if the boat is old, as
is sometimes the case. [https://www.reuters.com/article/us-asia-oil-
storage/in-lates...](https://www.reuters.com/article/us-asia-oil-storage/in-
latest-sign-of-crude-glut-aging-supertankers-used-to-store-unsold-oil-
idUSKBN19709N)

------
14
I know this is the wrong attitude but with no ties to the oil industry that I
am aware of I personally am enjoying watching the market crash and my cost of
gas go way down. However my understanding of the economy is poor. Does this
negatively effect the average joe or mainly oil producers?

~~~
burlesona
It depends on the region, but the energy sector is one of the major global
employers, and one of the best and biggest sources of quality blue collar jobs
(with benefits etc) when energy prices are high. That’s one of the reasons oil
and gas is so politically favored.

------
wuwuno
Saudi Arabia, our ally, is working hard to completely destroy the U.S. Shale
Oil industry, as well as the Russian Oil industry, and every other oil
producing country in the world.

The cost to produce oil in Saudi Arabia is about $6 a barrel and they are
taking this opportunity to undermine everything. Only Iraq is close in cost to
produce oil as the Saudi's, and the U.S. has worked to make sure that Iraq is
not a threat to the Saudi's.

~~~
jazzyk
Yes, but the Saudis reportedly need to charge ~$80/barrel to balance their
budget - and oil is their only source of income.

I am really not sure what game the Saudis are playing.

------
maallooc
It's an irony that in 1960 we believed oil would be extinct on 2000.

Turns out we are drowning in them in 2000+20.

------
rossdavidh
So, I have not yet seen any informed analysis of how this is impacting the
solar panel and wind turbine industries. I assume it would be bad, but I don't
know how bad. If anyone has knowledge of that, feel free to chime in.

------
lazyjones
It's not crude "nobody needs". It's just storage being too expensive to expand
infinitely. If it weren't, it'd be a great opportunity to stock up, because
the need will be there for decades.

------
aantix
The demand will rise again once this virus is done with.

~~~
empath75
Wouldn’t it be nice if it didn’t, though. Large numbers of people working from
home, cruise and airlines running fewer routes, people staying local instead
of traveling so much, more local farming and manufacturing so less money spent
on shipping....

~~~
sheeshkebab
Would be nice.... hordes of people on roads in metro areas driving their 3ton
chunks of metal, one person per chunk is just obnoxious unbelievable waste,
and all to mostly sit and write emails and chitchat a bit at “work”.

------
kindly_fo
I guess storage producers stocks are soyrocketing

------
neonate
[https://archive.md/JynCI](https://archive.md/JynCI)

------
chantelles
Or, to shift perspective, we are also in a class-war position of a general
strike.

------
eruci
This is great news!

------
qbaqbaqba
Drowning Russia in cheap oil is an old trick.

------
_yhdy
How to bypass free article limit?

~~~
stevoo
Two ways in Bloomberg. Either search in debug mode and disable two displays
that are what is disabling them or simply disable Javascript on their page. It
will be limited in functionality but you can read the article.

------
doggodad
Saudis want to put Putin out of the oil biz.

As such, gasoline in some parts of the US is currently going for $0.99/gal
(0.24€/L, 0.21£/L or 20 Rs/L).

And it's sort of funny/sad that what is called "blacktop" can be had for less
than free. Transportation and steamroller not included.

------
praptak
That's another piece of good news. Two countries with a particularly shitty
track records are in a lose-lose situation.

~~~
bpsh
Unfortunately the goal is to drive out US Shale ...

~~~
CydeWeys
So fracking stops in the US. Win-win-win?

~~~
imtringued
It's only a win after the switch to EVs. Before that you are going to need
every drop of that oil.

~~~
toomuchtodo
> Before that you are going to need every drop of that oil.

No, you’re not. You want to fundamentally damage oil production economics to
make oil as expensive as possible, to speed the uptake of EVs.

Cheap oil slows down the electrification of transportation. We don’t want
cheap oil. We want this price war to cause a spike in oil prices causing pain
to oil consumers.

------
alfianHac
So how to fix that broken

