Cheap oil has created a super profitable business

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Cheap oil has created a super profitable business

Black gold is sent to drift in the holds of tankers. Ships with oil began to accumulate off the coasts of California, Malta, South Africa, and other countries. This unique situation clearly demonstrates how much oil demand has changed overnight. However, experts believe that the era of extracting excess profits by the owners of the tanker fleet may not be very long.

A large number of oil tankers have accumulated off the coast of California. This is an abnormal situation: many ships do not have crew members, but the holds are filled with oil. Therefore, the US coast guard is forced to take additional measures to ensure the safety of ships at anchor and the environment, said the commander of the coast guard, Marshall Newberry, reports the Los Angeles Times.

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The holds of the accumulated tankers contain more than 20% of the world’s daily oil consumption-more than 20 million barrels with 100 million barrels of production per day. The vessels have been anchored for more than eight days.

This means that the situation with oil demand is heating up to the limits. If tankers have become the only alternative to storing crude oil, it means that the oil storage capacity on earth is already Packed to the brim. So, according to some reports, the capacity for oil storage in Cushing in the United States has reached the limit. US refineries and other consumers of crude oil simply stopped unloading it as unnecessary (demand for gasoline fell due to the quarantine). Therefore, oil is sent to drift in the holds of tankers without the possibility to send it for processing.

According to The Wall Street Journal, many oil tankers are also seen off the coast of Malta, South Africa, and elsewhere. The volume of hydrocarbons in the holds of tankers has increased by 76% since March 1, to 153 million barrels.

“Now a unique story is really happening with tankers. Some tankers are used as oil storage. Consumers buy up oil and pump it as inland storage,

so to tankers, ” says Igor Yushkov, a leading expert of the national energy security Fund.

Because of fears of a record oversupply of oil continues to crumble on the stock exchange. Last week, the price of WTI oil at the moment went into a negative plane, and Brent reached a historical low of $ 16 per barrel. On Monday, oil quotes for the next futures are again in the red zone. Brent is down 9-11% and WTI is down more than 27%.

So, June futures for WTI oil fell to $ 12.29. The price for July Brent futures fell to $ 22.56 per barrel, and June Brent futures fell to $ 19.3 per barrel. “The market knows that the problem with oil storage remains and we are on the right path to the full filling of oil storage facilities in the coming weeks. Prices can do nothing but fall when producers will soon have nowhere to store oil, ” says Bjornar Tunkhaugen, head of oil market research at Rystad Energy, according to Reuters.

“I can’t say how much oil is already stored in tankers and how much more can be pumped. But land storage facilities around the world have, of course, different occupancy rates. For example, Cushing recently had just under 30% of available capacity. At the current rate and volume of injection, it can be pumped there for about 20-30 more days, ” the expert believes.

And even in this difficult situation, there are winners-these are the owners of oil tankers that generate profits.

Now is the best time for the tanker business, said CEO of Nordic American Tankers Herbjorn Hansson in an interview with CNBC. “Now we earn a lot of money, seriously improving our balance. I have never seen such a strong market. We do not speculate on oil, we speculate on its delivery, and this is a completely different story, ” the owner of the tanker business believes.

According to experts, in the current conditions, Nordic can receive at least 70 thousand dollars per ship per day, issuing invoices to its main clients – Exxon Mobil and British Petroleum.

According to Yushkov, some tankers will continue to stand full and will wait for the recovery of demand, since the oil in them is bought at low prices in reserve. “However, the other part of the tankers will be empty, because they did not have time to fill them earlier, and now their freight is too expensive, and they will no longer be needed by anyone. After all, before the purchase of oil and the cost of storage in total was cheaper than now at low prices, but high freight rates, ” – does not exclude Igor Yushkov.

“Due to the demand for storage tankers, rental rates have increased significantly. And this, in turn, leads to the fact that suppliers begin to wonder whether it is not easier for them to simply stop production since delivery to the consumer is now too expensive, ” says Igor Yushkov.

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We are already receiving reports of a significant reduction in oil production by major players. So, the WSJ reports on the bankruptcy of one of the largest American oil companies, Diamond Offshore, which has 15 drilling platforms on its balance sheet and employs approximately 2.5 thousand people. This year, the company has already selected a $ 400 million credit line for the remainder of its revenue last year of $ 981 million. Diamond Offshore complains about the “sharp deterioration” of oil production in the United States due to the coronavirus pandemic. This may be a harbinger of the decline of the shale revolution in the United States.

The number of drilling rigs in the US is rapidly declining. Last week, it fell to a four-year low. If before the arrival of the pandemic 650 drilling rigs were working, now it is almost half as many-378 drilling rigs. One of the largest oil traders Trafigura believes that production in Texas, New Mexico, North Dakota, and other States will decline much faster than previously expected: it will be reduced by 1.5 million barrels per day by June (previously it was thought that only by December).

“The reduction in energy production occurs naturally since there is simply no physical demand for oil, which causes the collapse of current prices, although based on futures, market participants believe that the cost of hydrocarbons should increase in a few months,” says Sergey Suvorov, senior analyst at BCS Premier. We are talking about the fact that prices for oil futures for longer periods are higher than with deliveries for May and June.

Another major oil producer – Saudi Arabia-has decided to start cutting production ahead of the planned new OPEC+ deal deadline of May 1, Bloomberg reports, citing sources familiar with the situation. The Saudis will reduce production to the target level of 8.5 million barrels of oil per day before may. Other OPEC members also started cutting oil production ahead of schedule even earlier. These are Kuwait, Algeria, and Nigeria. Where there are no oil storage facilities or they fill up faster, such as in Nigeria, it is necessary to reduce production earlier and harder, Yushkov notes.

In his opinion, the threat of global storage overflow still persists. Because demand is not yet recovering at an active pace. Europe is only now announcing its withdrawal from quarantine, while China is recovering consumption rather weakly. Therefore, we can still see unplanned production cuts in certain countries or regions on the principle of “there was nowhere to put oil”, Igor Yushkov believes.

In such a unique situation, we can only hope for light at the end of the tunnel. Most experts agree that the drop in global oil demand has reached its peak, Alexander Novak, the head of the energy Ministry, said on Monday. This means that the situation will gradually begin to improve, which will also help the new OPEC + deal.

Demand for oil in a number of European countries, where significant supplies of Russian oil go, has already begun to grow. “In the countries of Central and Northern Europe, there are already some such sprouts of positive growth in demand. At gas stations, the drop in demand was up to 70%, today in some countries we see a decrease in this indicator to 60-65%, ” Novak said.

Novak believes that the passage of the most difficult period for the oil market depends on how the history related to the pandemic will continue to develop, how quickly normal life, aviation, and transport links, and the work of enterprises will be restored. Most likely, the economy will begin to recover in the second half of the year, and this will mean an increase in demand for energy resources, the energy Minister believes.

“I think that in July the situation will begin to change. Because in may – June, demand will recover, and production will decrease, ” Yushkov expects.

As for Russian oil, its production costs are low compared to the same American shale producers or Canadian producers, so it does not face a natural reduction. However, Russia will reduce production under the OPEC + deal to 8.5 million barrels per day, as well as the Saudis, and this carries certain risks since both stopping our wells and restarting them is not always easy to implement technologically, Suvorov notes.