The Real Economy

The Perfect Storm For Oil Hits In Two Months: US Crude Production To Soar Just As Storage Runs Out

Zero Hedge,

21 March, 2015

Less than two weeks ago we warned that based on the current oil production trend, the US may run out of storage for crude as soon as June.








This is what we said back in early March when the BTFDers were hoping WTI in the low $40s would never again be seen:

Come June, when all available on-land storage is exhausted, each incremental barrel will have to be dumped on the market forcing prices lower and inflicting further pain on the entire US shale complex (just as Q1 results are released which will invariably show huge writedowns as companies will no longer be able to hide behind the SEC-mandated accounting trick that made Q4 results appear respectable). Here's Soc Gen:  "...oil markets can be impatient and prices could drop considerably lower. As we have written previously, we are currently more concerned about downside risk than upside risk."

Since then, as expected, crude tumbled to new post-Lehman lows, confirming the global deflationary wave is raging (for more details please see China), and WTI only posted a rebound on quad-witching Friday as another algo-driven stop hunt spooked all those who were short the energy complex.


The problem is that despite the latest "dead oil bounce" we have since had to revise our forecast for full US oil storage, and pulled forward the date when this will happen in the aftermath of the latest API inventory data.


Recall that earlier this week API reported, and EIA later confirmed, that for the 10th week in a row there was a "massive 10.5 million barrels (far bigger than the 3.1 million barrel expectation) and a 3 million barrel build at Cushing. If this holds for DOE data tomorrow (and worryingly API has tended to underestimate the build in recent weeks) it will be the biggest weekly build since 2001."




The DOE indeed confirmed all of this:





It also means that at the current rate of record oil production, storage will be exhausted in under two months, some time in mid-May. At that point, with no more storage to buffer the record oil production, the open market dumping begins and prices of WTI will crater as every barrel will have to be sold at any clearing price, since the producers will have no other choice than to, literally, dump the oil.
In other words, a perfect storm is shaping up for oil some time in late May, early June.

And then we learned something even more startling.

As the Platts oil blog reports, even as oil prices continue to fall amid flat demand and near-record supply, "North Dakota is likely to see a “big surge” in production this June, potentially besting another supply record even if prices continue to crater, according to Lynn Helms, director of the state’s Department of Mineral Reяources."


What make things worse is that this time the production "surge" will have nothing to do with game theory, or beggaring thy oil producing neighbor in hopes that the other, more levered guy goes bankrupt first.


This surge will be largely propelled by two factors: a state-mandated time limit on drilling and the expected trigger of a major oil tax incentive, Helms said.

Here is how Bakken production has looked like in recent months:

Helms, the state’s top oil and gas official, reported last week that North Dakota oil production fell about 3%, or about 37,000 b/d, to 1.190 million b/d from December’s all-time high of 1.227 million b/d. The reduction was expected as sweet crude prices averaged $31.41/barrel in January, down from $40.74/b a month earlier and the statewide rig count fell by 21 to 161.

But Helms said he doesn’t expect production to tumble dramatically, even as prices continue to fall, and even though he expects the statewide rig count to “bottom out” at about 100 rigs. Production, he said, will likely remain between 1.1 million b/d to 1.2 million b/d over the next few months.

Nothing surprising.



And then this will happen: "Bakken production could suddenly skyrocket, by nearly 10%, or an additional 75,000 b/d, to 100,000 b/d in June, Helms said." This means that despite low prices and production curtailments throughout much of North America, oil production in North Dakota could actually shatter a new record this summer!

This is mainly due to a backlog of between 800 to 1,000 uncompleted wells statewide, about 125 of which need to be completed by the end of June in order to comply with state requirements to complete drilling within a year.

At the same time, operators may wait until June, when a major oil tax incentive known as the “large trigger” is expected to go into effect. The large trigger, which is aimed at boosting Bakken production at times of low crude prices, enters into force when the WTI crude price averages below $55.09/b for five consecutive months.

If that incentive is triggered, which Ryan Rauschenberger, North Dakota’s tax commissioner, said he expects will happen, the majority of wells will be exempt from a 6.5% oil extraction tax for as long as two years.

With that tax break in effect and hundreds more wells running up against one-year state deadlines, production in North Dakota could continue to surge even beyond the summer.

“We’re going to ride these waves of production increases,“ Helms said.


And that, coming just as US spare oil capacity hits its limit, is precisely what all those BTFDers who bought first junk bonds, and most recently, a desperate scramble in follow-on equity offerings by the universe of cash burning US shale companies, is precisely what they did not want to hear. Because no amount of Fed ramblings about the ever weaker US economy will offset what is about to be a veritable oil tsunami.


The time to buy asset may be when there is blood on the streets, but the moment to dump crude (and buy deep OTM puts) will be precisely when the majority of investors and algo-programming math PhDs realize that in just about two months the streets are about to become black, covered entirely in oil.

Just as Global Oil Glut Deepens, China Cuts Oil Imports

Zero Hedge,
20 March, 2015

Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter


“We don’t want to lose our share in the market,” Kuwait Oil Minister Ali al-Omair said on Thursday. OPEC had to maintain production despite the plunge in price since last summer, he said, underscoring Saudi Arabia’s position. OPEC would not cut production to goose prices. It would not let the American fracking boom off the hook.

The price of oil promptly dropped, annihilating much of the Fed-inspired rally the day before.

No one wants to cut production. In the US, production is still soaring. Demand is lackluster. What gives? Crude oil is piling up around the globe.

Commercial inventories across all OECD countries can now supply 28 days’ of OECD demand, near the very top of the range, the EIA reported.

In the US, the amount of oil in commercial storage facilities (not counting the Strategic Petroleum Reserve) is at historic highs. Another 9.6 million barrels were added during the latest week. To put that in perspective: the US produces 9.3 million barrels per day. So in one week, the US added nearly one day’s production to its already high crude oil stocks! According to the EIA, stocks now amount to 458.5 million barrels, up 22% from a year ago.

By another measure, at the end of February the US was sitting on 29 days’ supply, the most since the 1980s when the last big oil bust was wreaking havoc in the American oil patch.

Speculation is now running wild that the US will run out of crude oil storage capacity. Some voices are claiming that storage in Cushing, Oklahoma, which accounts for 14% of the US total and serves as delivery point for WTI futures contracts, could be full by April.

These speculations have dollar signs at the other end. When storage gets scarcer, or when the perception can be stirred up that it will get scarcer, storage fees jump, boosting revenues and profits of the storage companies. There’s money to be made, as long as the speculation can be maintained. And so the insiders came out all guns blazing.

“Demand for our storage services in Cushing has been robust,” said Robb Barnes, senior VP for commercial crude oil at Magellan Midstream Partners LP, according to Bloomberg. The company has 12 million barrels of storage capacity in Cushing, and all its tanks had been leased, it said.

Fees have been rising “fairly rapidly over the last six months,” Blueknight Energy Partners CEO Mark Hurley told investors. The company has 6.6 million barrels of capacity at Cushing.

All publicly traded storage companies have told investors that profits in 2015 would be higher than in 2014. At least someone is making money during the oil bus.

And it’s not just in the US.

“You’ll find all the locations around the world that can store crude now, like Saldanha Bay or the Caribbean, are going to be full,” said Jared Pearl, commercial director of VTTI in Rotterdam. The group includes Vitol, the largest independent oil trader. “It would be crazy if they weren’t.”

And just when we might be tempted to think – cynical as we are about these sorts of things – that they were just talking their book, China, second largest oil consumer in the world, chimes in.

China has been buying cheap oil since August to fill its Strategic Petroleum Reserves. This buying has been one of the demand drivers in Asia and has provided some support even while prices crashed. The government keeps largely mum about the SPR. But the plan is to increase it to around 600 million barrels, which would be about 90 days’ worth of imports. According to Reuters, most estimates place current storage levels at 30-40 days’ worth of imports. In December, China imported an all-time record of 7.2 million barrels per day. Alas…

“I don’t think there is much space left to fill,” a Chinese storage executive told Reuters under the condition of anonymity. He said that in the Zhoushan area of Zhejiang province, where two SPR bases and major commercial storage facilities are located, tanks “are so full that one VLCC tanker owned by a state refiner has had to wait for almost 15 days to discharge.”

Then there is the demand issue. The Chinese economy is growing, according to government figures, at the slowest rate in 25 years. And now there are expectations that refiners could process less crude in the second quarter. So China will likely curtail its purchases, at least temporarily.

Including China, Asian crude oil imports overall have dropped 5% from the peak in December, according to Thomson Reuters data. Imports by India were down 20% in February from a year ago; imports by Japan were down 11%, largely due to the approaching refinery maintenance season.

Even if these folks are talking their book to goose storage fees, one thing is clear: storage levels are high around the globe, and they’re still rising, while demand is nothing to write home about. It adds to the picture of a worsening global oil glut that will continue to pressure prices, bloody up producers, and maul investors and lenders.

The fracking boom in the US started with natural gas. And now it’s destroying its investors. Read…  Investors Crushed as US Natural Gas Drillers Blow Up

The Baltic shipping index has always been a good indicator of the state of the Real Economy

Global Trade Grinds To A Crawl

Zero Hedge,

21 March, 2015

At the start of this month, those who contend that depression-level readings on the Baltic Dry are no longer very meaningful because at this juncture, the index simply shows the extent to which the industry is oversupplied got a rude awakening when the CEO of the company (Maersk) that handles nearly a fifth of global seaborne freight decided to ruin everyone’s day by daring to suggest that in fact, global growth is rather abysmal and will likely continue to depress demand the world over. Worse, Skou went as far as saying that the days of 10% container growth for his industry are probably gone forever and yet despite it all, he’s buying more ships in what FT says is an effort to “help the company maintain its market leadership position,” which is of course just a nice way of saying that now many be a good time to eliminate the competition. As an aside, Skou also didn’t seem to share Richard Fisher’s assessment of the US as an “epicenter” of growth, saying America was “good but not great,” suggesting that as Rick Santelli told Fisher, it’s easy to score at the upper end of the range on a scale of 1-10 when a “1” basically equates to a deflationary death spiral and “10” just means something akin to not-collapsing. 


Here’s how we summed up the situation at the time: 

And yet the biggest paradox, or perhaps most logical outcome, of all this is that just as margins are about to be squeezed across the entire global supply chain, the healthier companies are now rushing to do what the oil driller are doing, and overproduce, in the process pushing prices even lower in hopes of putting marginal companies, and those which don't have access to cheap and easy funds, out of business. Call it the Amazon effect, only here one is dealing with net debt leverage of 3x, 4x or higher.

So with global demand lower as a result of slowing trade, and with Maersk about to boost ship supply even more, the result will be an even more aggressive drop in cargo and haulage prices as the deflationary wave hits yet another industry, in the process forcing seaborne transportation to be the latest to succumb to deflation, which for the highly levered sector means even more defaults are imminent now that China no longer is pumping nearly $4 trilion in total new credit every year. 

Today, we got still more evidence from the world of seaborne freight that in fact, global trade may be grinding to a halt. As Reuters notes, freight rates declined for a seventh straight week plunging double-digits to the lowest levels in nearly 2 years: 

Shipping freight rates for transporting containers from ports in Asia to Northern Europe fell 12.4 percent to $620 per 20-foot container (TEU) in the week ended on Friday, a source with access to data from the Shanghai Containerized Freight Index told Reuters.

It was the seventh consecutive week with falling freight rates on the world's busiest trade route and the current level is the lowest seen since June 2013.

In the week to Friday, container freight rates dropped 15.5 percent from Asia to ports in the Mediterranean, and fell 4.7 percent to ports on the U.S. West Coast and were down 4.7 percent to ports on the U.S. East Coast.

And while there are still plenty of commentators who will suggest that oversupply is the controlling factor here, the evidence just seems to be mounting that it could be the other way around or as we put it: “...yes supply isn't helping, but it is the lack of global demand that is pushing equilibrium levels lower, aka global deflation.”


Meanwhile, shippers seem to suffer from the same disposition which Chinese regulators warned today may end up generating huge losses for investors, for, as The Economist puts it, “owners are habitually more worried about missing out on an upturn than they are about getting caught by a downturn.”


On that note, we’ll leave you with the following bit of advice from the China Securities Regulatory Commission which seems applicable here: 

“We shouldn’t be thinking if we don’t buy now, we will miss it.”

CrossTalk: Russia's Econ 

To date 2015 is turning into a difficult year for the Russian economy. The dramatic drop in oil prices has halved the value of the ruble and stoked inflation. At this point the consensus is Russia will experience a short but sharp recession. Is the government doing the right things?

CrossTalking with Yaroslav Lissovolik and David Gray