Goldman Eyes $20 Oil; Glut Overwhelms Storage Sites

The price of two oil benchmarks, Brent Crude and West Texas Intermediate (WTI), in danger of collapse? (source)

by Gaius Publius

Ever since the "Exxon Knew" story broke, and especially since NY AG Eric Schneiderman announced his Martin Act investigation of Exxon and other carbon companies for fraud, I've been watching to see how this disrupts the oil and gas markets.

To be clear — I consider a disrupted carbon fuel market to be good, since the supply of fossil fuel does have to be interrupted, and forcefully. Consider that if they dig it, we will burn it. So we have to prevent them digging it, and again, with force. The law, when applied with penalties, counts as force. A collapsing commodity price market also counts as force, as does a collapsing stock market price for companies like Exxon.

The alternative, if the market for extracted carbon starts to collapse or become wildly chaotic, is for government to prop it up with even more subsidies and "bailouts" — the opposite of what any climate-aware citizen should want. We need to get off of oil, as a nation, quickly, and we need all the help we can get doing it. I don't want to see government standing in the way of the destruction of the oil and gas industry. (Do you?)

So, is the carbon market headed for chaos? I don't know, but the possibility of oil at $20/barrel is frightening many analysts, including those at Goldman Sachs. From the Telegraph (my emphasis):

Goldman eyes $20 oil as glut overwhelms storage sites

“The world is floating in oil. The numbers we are facing now are dreadful," said David Hufton from PVM Group

The world is running out of storage facilities for surging supplies of oil and may soon exhaust tanker space offshore, raising the chances of a violent plunge in crude prices over coming weeks, experts have warned.

Goldman Sachs told clients that the increasing glut of oil on the global market has combined with mild weather from a freak El Nino this winter. The twin-effect could send prices plummeting to $20 a barrel, the so-called ‘cash cost’ that forces drillers to abandon production. “Risks of a sharp leg lower remain elevated,” it said.

Oil has fallen from $110 a barrel early last year and is hovering near $40 for US crude, and $44 for Brent in Europe.

The US investment bank said the overall glut in the commodity markets may take another twelve months to clear. It cited ‘red flag’ signals on the Shanghai Future Exchange over recent days. Copper contracts point to “imminent weakening” in China’s ‘old economy’ of heavy industry and construction, it said.

The chart at the top shows that benchmark prices have dropped to about $36/barrel, risen but not to new near-term highs, then dropped again. A technical analyst would say, watch that $35 price point. A drop below that could be trouble.

Now for the fundamentals. Note in the quote above: "$20 a barrel [is] the so-called 'cash cost'." At present, people are keeping their oil off the market, not selling their inventory in hopes of a better price ...

It is estimated that at least 100m barrels are now being stored on tankers offshore, waiting for better prices. A queue of 39 vessels carrying 28m barrels is laid up outside the Texas port of Galveston, while the Iranians have a further 30m barrels offshore ready to sell as soon as sanctions are lifted.

“The world is floating in oil, and commercial stocks on land are at a record high,” said David Hufton, head of oil brokers PVM Group. “The numbers we are facing now are dreadful. Stocks have been building continuously for two years. This is unprecedented.”

... yet even so, prices are falling, despite current buying by the Chinese for their strategic reserve (see the article for those details). We're in new territory at present — low prices, high inventory, high production — and could be headed for even newer territory.

The Story Is Complicated; the Outcomes Are Many

This is not a simple story, as the article makes clear. No one in position to comment expects a permanent collapse, yet the items in play are both many and varied. To name just a few, they include conflict among the OPEC nations about how much to produce, the length of time the bear market in oil will stay depressed, the ability of marginally-financed producers — the U.S. shale oil producers qualify here — to stay afloat in a "below cost of production" sales environment, the worldwide growing awareness that climate change and carbon emissions are linked, and so on.

At some point, if these conditions prevail (the last will certainly grow stronger), carbon production will drastically slow and companies will simply go bankrupt. At that point, absent government intervention, if you're an investor do you buy or sell the stock of these companies?

Now add in AG Schneiderman's fraud lawsuit, and then, way down the road, the potential for a Sarbanes-Oxley prosecution to yield criminal charges and jail time for oil and gas execs — assuming some AG (that's you, Ms. Lynch; that's you, whomever President Sanders appoints) is bold enough to pursue that course. That will certainly stir the pot even further, and not in a good way. Just the announced intent to pursue Sarbanes-Oxley prosecution could further roil this market — the roilage of which is your friend, since an uncertain energy market drives an increased move to "safer" renewables.

At this point, it's all up in the air. Oil prices may recover and the market re-stabilize. That would be a bad thing, assuming you have grandchildren and care about them. But the good news is ... right now, it really is all up in the air. That good thing that could turn into a very good thing with just a few more breaks our way.

GP