Who Ordered This Stuff?
I am reading this on Bloomberg entitled “Saudi oil rush threatens to disrupt stabilizing U.S. oil market.”
These shipments are planned, Saudis are not sending this over out of the goodness of their hearts. Furthermore, the shipments themselves take roughly 21 days to get to the US. The orders were placed over 3 weeks ago. When you have a lot of US capacity which produces at a higher price and we are seeking to become oil independent and we are seeking to become manufacturing independent; why would you destroy your capability if we want made in America product? Who is the perpetrator?
Bloomberg: “Over 30 tankers laden are set to arrive in the U.S. Gulf Coast and West Coast during May and June, according to ship tracking data compiled by Bloomberg. The more-than 50 million barrels of Saudi crude on the water threaten to disrupt a positive supply development: U.S. crude stockpiles declined for the first time since January and inventories at the Cushing, Oklahoma storage hub contracted by the most in months.
Director of oil and products research at Morningstar Inc., Sandy Fielden: ‘The expected Saudi deliveries could push U.S. inventories back to builds depending on their timing. If the shipments land at a rate that isn’t balanced by falling production or an uptick in exports, then we’ll see a domestic build.'”
What a surprise. What he is saying here is if you see two shipments a week which surpasses demand rather than one shipment per week to match demand, inventory will build once again and prices will drop. Fracking as a business will decrease. Once again, we will be at the mercy of an unstable Middle East and now the Russians.
Unless of course, you do not want to have oil from fracking as your plan is to use MidEast oil up sooner.
Bloomberg Points:
- “The oil industry has been on edge for months with onshore and offshore storage capacity levels tested worldwide due to ballooning oil inventories spurred by the Covid-19 demand slowdown. On the U.S. West Coast, crude stockpiles are less than 5 million barrels short of reaching the region’s storage capacity.
- Data from the Energy Information Administration this week showed U.S. crude production dropped for a sixth straight week to the lowest in nearly a year. But even though output is steadily declining, there are still volumes being produced that may have to jostle with Saudi deliveries for storage space.
Paola Rodriguez-Masiu, a senior oil market analyst at Rystad Energy: ‘If all the Saudi tankers unload, the crude they carry will offset during May almost all of the production reductions from March levels, effectively maintaining the current high storage filling rates.'”
Bloomberg Summary:
Very Large Crude Carries (VLCCs) routed to the U.S. Gulf include the vessels Shaybah, Hong Kong Spirit, and Dalma according to ship tracking data. Tankers routed to the Pacific Coast include the vessels Sea Jade and Sikinos I or supertankers which will deliver over 45 million barrels of Arabian crude to Gulf buyers and at least 7 million to Pacific users. The volume of oil arriving in May and June is equal to nearly a third of all Saudi crude delivered to the U.S. last year.
Arriving Inventory versus Storage:
West Coast crude stockpiles are currently at 58.2 million barrels or 5 million barrels less than storage capacity (see above). The inventory picture is brighter on the U.S. Gulf Coast or America’s refining belt. Crude inventories there are 88 million barrels shy of reaching total storage capacity.
An off set to the massive shipments might be slow offloading of the oil at refineries. ” The market is witnessing delays in discharging Saudi oil. For some ships, it has taken about two weeks to unload cargoes, about twice the usual time to finish the job as small ships that are needed to unload have become increasingly scarce.”
Even with higher prices on Saudi oil, US prices for gasoline and other products will again drop. “Oil imports from Saudi Arabia are not set to slow down anytime soon even as the kingdom deepens its production cuts and raises prices for June supply. Plus, a true demand recovery worldwide isn’t expected for at least another year.”
More trouble for domestic resources as their costs exceed market pricing.
Is somebody in charge here?
Well we always have the option of using less of the garbage.
We also have the option of producing less and with current prices that is going to happen very rapidly. Fracking is now unprofitable.
Spencer:
The question is do we drive it out of business and take our chances with the Arabs like we did in the seventies or do we preserve fracking in some manner?
@SW – If we use less would that not further increase supply and crash the oil market in the short-term
If somebody is in charge it’s not clear it’s the lenders. The high yield bonds issued to pay for the fracking mess are going to end up in all kinds of unexpected places. Kind of like that subprime mortgage debacle 12 or so years ago. What counterparty risk?
Petroleum is a dying industry. Look at King Coal. A hundred years ago it would have been hard to imagine the coal industry on the ropes. It was 100% essential, at least before the diesel engine, the rise of the automobile, air travel and so on. Coal extraction is increasingly efficient,, but it is the fuel of the past, not the future.
Petroleum is in a similar situation. It is far from dead, but wind and solar power with their low marginal costs and long term capital prospects are taking its margins. Now, the competition is about which producers will be the last ones standing. The business will be quite different in 50 years. If I were MbS, I’d be playing games like this. Fracking made sense at $60 a barrel, but the world is awash in petroleum.
This “decision” is quite old now. In a ‘mother of all bad timings’ Russia pissed off OPEC and the Saudi’s months ago. JUST before global lock-downs started and killed demand. MBS said on THAT day “this will be a very regrettable day” and the Saudi’s went full bore to bust out higher producers. They were “in charge” when a slug of tankers to float if need be was done. Again, MONTHS ago. Russia is essentially just as at fault too. They let OPEC constraint talks completely blow up.
Hi Merrill,
With my answering you, your comment is approved. We do this to keep out hackers, spammers, and advertising. In 73, we were faced with similar where the Arabs raised prices instead of flooding us with oil and then they controlled inventory. It was the right move as we did not have an alternative supply. Now we have an alternative supply based in the US which costs a bit more. I am not sure what you think of $2/gallon gasoline. I have no problem with it and it keeps our resource going till it is used up. $1 – $1.75 oil/gasoline from the Arabs or Russians is meant to accomplish one thing which is drive the US oil/gasoline business out-of-business. Do we let this happen by allowing an inventory build or stop the shipments?
It is pretty obvious what they are up to.
For sure. Russia was long tired of holding back while shale picked up the slack. So when they wouldn’t keep it going Saudi’s essentially said we not going to do it alone – THEN it was start flooding the market and kill off shale. THAT is when they chartered all these tankers. They (like most) didn’t quite see the Covid collapse yet. Not sure they could/would have so unilaterally helped then anyway. like most they are not into unilateral disarmament
Totally agree on burning others cheaper 1st. Interesting thing about shale – if/when the price comes back they’ll largely know where and when to spend $ to get it.
Merrill:
Read RJS who blogs on oil. As a logistics person, I would not be happy with them. As a purchasing person, I would not be happy with their efforts to constrain a US business with their market control of supply again. If I have an assured supply, why would I switch to a supplier who using their control of a strategic material to cause us economic harm? I would think very carefully about going with them and how long it takes to off load those ships.
this oil was loaded after the breakdown of OPEC + Russia agreement to cut oil production in the first quarter, when Saudi and its Gulf allies were engaged in an oil price war against the Russians and against US shale, but before their mid-April agreement to cut production by 9.7 million barrels a day (from the record October 2018 level, but that’s another story)
during that period, the Saudis, the Emirates & Kuwait had increased their production by almost 3 million barrels per day from their constrained level, while at the same time their was an 18 million bpd drop in demand…so i doubt anyone “ordered this stuff”; for that brief period, the Saudis were engaged in a kamikaze-like attempt to flood the world with oil & put their competition out of business (they tried that circa 2015 too) …the result of that is we’ve got these fleets of tankers heading to all corners of the globe, which they had intended to use to undercut all their competition in every market theyre vying in (ie, see A Huge Fleet Of 117 Tankers Is Bringing Super Cheap Crude To China | OilPrice.com ) what they’ll do now, that they’re again trying to constrain supply, is anyone’s guess…but the oil sitting off our coast right now does not represent policy, it represents a two or three week hissy-fit on the part of MbS and his Emirates counterpart which i rather suspect they now regret more than they’d admit…
if anyone is interested in more detail: global oil surplus at a record 18.2 million barrels per day in April, 22.3% over demand; horizontal drilling at Aug 2006 low
i had originally written that headline as “22.3% more oil than anyone wanted”, which is what we’re dealing with here….that tanker fleet heading to China is said to be carrying 230 million barrels of oil, & hence it accounts for 13 days of that unwanted April surplus..
rjs:
I had a supplier for Lunchable cartons which was white (92 brightness outside recycled material). When OM became a part of Kraft, they had a carton supplier too. That supplier desperately wanted my business, held a lobster bisque picnic for us in Massachusetts (we flew the Oscar Mayer wiener mo-jet out there).
I had a dilemma with the Kraft supplier. Do I make the switch to them from a supplier who developed the packaging and owned the recycled material (patented), switch to virgin material, and make the supplier and perhaps Kraft happy or stay put. It was getting down to the point where I had to decide. There was no cost advantage. They were just a Kraft supplier.
I told them to wait as we were still discussing it. We finally reached a decision and stayed with the original supplier as we had the recycling symbol. the cost was les, and we received excellent service to the multi-plants making the product. But the supplier did not wait and they started to process the material claiming it was necessary to start on a particular date. When I told them “no” we were not switching, they said they had $70,000 in costs. I told them “no” we would not pay for that either as they did not wait for my ok.
If I did not order this oil, why should we take it and drive our partners out of business? The Saudi’s are playing the opposite of what they did in 73. If we allow them to hurt our companies, they will be in control again of costs and the prices. It can sit on their ships for a few more months and they can absorb the costs of storage and their ships.
run, i can’t give you an unbiased answer as to what the policy response should be to those producers who would dump their cheap oil on our markets at below our costs of production, cause i’ve always been opposed to our “drain America first” approach…however, just the existence of that oil offshore has the same effect on the fracking industry’s viability as if it were offloaded and refined, because it affects the price everyone gets for what they produce…but as i tried to explain, this is a one time thing; the Saudis are already cutting production and will cut by another million bpd in June, so i’m not sure it merits a policy response…furthermore, the Saudis are not getting hurt by having that oil sit out there; about the time those tankers were being loaded, US oil prices were below $0, and they’re over $30 now…
This discussion does not seem to be keeping up with the latest developments in the oil markets. These shipments by the Saudis were a big freakout when oil prices were crashing, indeed so hard some of them briefly even went negative.
But that is all over now. Oil prices have been soaring for a couple of weeks now, with both Brent crude and WTI both well over $30 per barrel. This is still too low for many producers, including many in the US shale sector, so those Saudi shipments are still a pain in the whatever. But this situation is very different from what it was just ten days ago, and if these current trends continue for a couple more weeks as they have been, all this freakout over low oil prices and meanie Saudis in cahoots with somebody in the US will just disappear as a big nothingburger.
Barkley:
I would say it is controlling your supply chain. Not too much and not too little over the transit time to the states. The article at the time of posting was 4 days old. Unless we are planning on a surge in demand, why would you bring in so much supply? Arriving in May translates to leaving port a couple of weeks ago considering three weeks on the ocean. Perhaps you have more accurate info?
Sometimes you can take the excess and store it in containers outside a facility and it works even though you now own it as a cost. The Mexicans I worked with in Juarez did that with rolls of tape they mistakenly ordered when the temperature was in the nineties. They made rather nice hockey pucks afterwards. Another time an associate in my own office failed to pay attention to a message from Sabic (Saudi) for a particular resin for which we used small quantities. The Saudi company was changing their ERP system over to SAP. The DA in the office ignored the message which the Mexicans sent to me afterwards. Similar issue, if you do not control and monitor your supply chain, you end up with an over abundance of one and not enough of another.
If you have updated information for which I can review or an article to read, I would be delighted to read it. As far as the meanies, it is a matter of controlling the supply chain and not allowing a supplier to talk advantage of you when there is over capacity.