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Petro Questions and (Some) Answers

Petro Questions and (Some) Answers thumbnail

These are unusual times in oil and gasoline markets, but not really mysterious.

Everyone has a role to play in the pandemic. My primary role – as my younger friends remind me – is to stay the hell home, and out of the hospital. Check. But the questions in my inbox lately suggest another role: attempting to explain petroleum markets, from Oklahoma crude to the California pump prices. So, cribbing from those emails, here goes…

Negative Oil Prices?!? How did that happen and what does it mean?

If you follow energy, you couldn’t have missed the excitement on April 20, when “the price of oil went negative.” There was a lot of huffing and puffing around this, most of it unwarranted.

PetroQuestionsFig1First, the price of oil that went negative was for May 2020 delivery to Cushing, Oklahoma, known as the West Texas Intermediate (WTI) futures contract. Ten years ago, this would’ve been a somewhat bigger deal, because the WTI contract was the world’s benchmark oil price. It isn’t anymore, and hasn’t been since 2011. That was when pipeline capacity for carrying oil from the center of the continent–West Texas, Oklahoma, North Dakota, Alberta, etc–to the Gulf Coast became so overwhelmed that mid-continent oil suppliers couldn’t move all their supply. The WTI price dropped well below other world prices, and WTI became just a regional price index. While the May WTI contract went negative on April 20, the new benchmark world oil price, Europe’s Brent crude, stayed above $25 per barrel.

Second, the only contract that went negative was for delivery in May. The price for WTI delivery in June remained well above zero though still distressingly low if you were a producer, dropping near $20 per barrel.

What happened was that demand everywhere had collapsed due to the pandemic, but oil wells can’t turn off quickly. With crude oil being stored wherever there was a facility that could take it, the oil-rich middle of the country didn’t have enough space for the huge amount of extra supply there. And they couldn’t ship it elsewhere, because pipelines were at capacity. Some buyers were obligated to take oil, but had nowhere to put it, so this valuable commodity looked like it could turn into a liability. A small number of buyers panicked and started paying others to take that responsibility off their hands. By the next day, the panic subsided and the price turned positive, though still low.

PetroQuestionsFig4It was a strange event, but it represented very few barrels of oil. Furthermore, research Ryan Kellogg and I published in 2014 suggests that the beneficiaries of even that cheap oil in the middle-US will be refiners, not consumers. Mid-continent gasoline prices don’t follow mid-continent oil prices, because gas can still move around the country (different pipelines) so the gas price still reflects world oil prices. That is, it’s Brent, not WTI, that matters to even U.S. drivers. 

Are today’s low oil prices mostly due to cratering demand or to a price war among cartel producers?

OPEC Schmopec. Saudi Arabia had barely started to make good on the output increase it promised in March when it reversed course and began decreasing. This week, the Saudis announced they would decrease production to well below pre-COVID levels. Even the increase they threatened in March was less than 3 million barrels per day (bpd) in a market that started at around 100 million bpd. In contrast, it looks like world demand bottomed out in mid-April down around 30 million bpd. And it’s likely to be down 20 million bpd for the entire second quarter of 2020. Not even in its fondest market manipulation dreams can Saudi Arabia overcome being ghosted by that many buyers.

Where are oil prices headed?

Most economists start by looking at the crude oil futures market. Oil prices recovered somewhat last week, as many lockdowns were eased, with the July contract for Brent closing around $33 per barrel on Friday. Meanwhile the contract for July 2022 closed at $41, so the best guess from traders is that the price will gradually drift upward. Still, those forecasts are never very reliable, and especially right now. The single biggest factor that will determine the course of oil prices, and the economy generally, is the science of treating and preventing COVID-19. If you can predict when an effective drug or vaccine will be widely available, you can make a lot of money in nearly any asset market these days. 

Why haven’t pump prices fallen as much as crude oil?

They have. The standard relationship is that every $1 per barrel drop in the crude oil price translates to 2.5 cents at the pump. Comparing to six months or a year ago, that is what has happened. A $40 per barrel crude drop since May 2019 has resulted in about a one dollar per gallon gas price decline. There is gradual adjustment in retail prices, particularly on the downside, so the change wasn’t as dramatic as oil.

In the wholesale market, the commodity price (for huge bulk purchases) of gasoline actually dropped more than the cost of crude oil for a while, because refineries were unable to ratchet down their gasoline production as fast as demand was disappearing. In fact, for a few days in April, commodity gasoline was selling for less than the crude oil that went into making it. Being an oil producer these days is pretty awful, but being a refiner isn’t much fun either. Refineries have now reduced their throughput and refinery margins on gasoline have improved. 

PetroQuestionsFig3What has happened to California’s Mystery Gasoline Surcharge (MGS)? And what about the California Attorney General’s announcement on May 8 that they are prosecuting some traders?

The MGS is alive and well, I’m sorry to say. But it has declined a little bit in recent weeks. As of this morning, California’s average pump price is $1.01 above the rest of the country. About $0.71 of that can be directly tied to higher taxes, environmental fees, and our cleaner burning gasoline. The MGS is the difference, about 30 cents. At normal consumption levels that would mean Californians would pay an unexplained extra $4 billion per year. It will be a bit less this year, but is still on track to be north of $3 billion.

The AG’s announcement was interesting, but it isn’t likely to explain much of the MGS. The case they announced was for behavior in 2015 and 2016, and it was for activities that raise the commodity price. As I have discussed in a previous blog, that’s not where most of the MGS has come from in the last few years. The AG said that the investigation continues, which I was pleased to hear. 

Why is the federal government bailing out oil U.S. producers? If the point is to help workers in the industry, why don’t they just help the workers directly? Especially in an industry where a small share of revenues go to labor and most of the benefit of the bailout will go to shareholders?

Why indeed.



63 Comments on "Petro Questions and (Some) Answers"

  1. REAL Green on Tue, 19th May 2020 11:56 pm 

    Fuck you davy. You ignorant rednecked stupid dumbass idiot degenerate.

  2. Abraham van Helsing on Wed, 20th May 2020 4:44 am 

    “Pick for Britain!”

    https://www.youtube.com/watch?v=taHhUoxvBL8

    Now that the UK has escaped from “the shackles of the EU”, it no longer has the opportunity to hand pick tough and cheap Eastern European workers to bring in the harvest. So prince Charles was mobilized to place himself at the helm of “the land army” (I’m not making this up) in an attempt to recruit white, home-grown British workers to pick fruit rather than their noses.

    On the German telly yesterday they interviewed a desperate British farmer, begging the London government to bring in Eastern Europeans, who are three times as productiveas the white locals (the coloreds won’t even bother), but BoJo has different worries than the harvest. After all farming is as far-away from the preferred financial “industry” as possible.

    https://www.edp24.co.uk/business/farming/farmers-react-to-treasury-adviser-dr-tim-leunig-s-leaked-emails-1-6545382

    “‘It is just daft’ – Angry response to suggestion that UK doesn’t need farmers”

    Won’t be easy for a generation of social media dwellers to develop the required toughness, now that “Brexit is irreparably done”. Perhaps a chronic empty tummy will help provide the required “stimulus package”.

    And to be fair to BoJo, bringing in the harvest is not in line with his latest policy:

    https://www.thesun.co.uk/news/11627946/boris-johnson-obesity-fight-coronavirus-weight-hospital/

    “WAR ON FAT Boris Johnson to tackle obesity in fight against coronavirus after ‘believing his weight led to hospital visit’”

  3. Davy on Wed, 20th May 2020 5:51 am 

    “German Economist Warns Italy Faces Eurozone Exit As Coronavirus Crisis Deepens”
    https://www.zerohedge.com/markets/german-economist-warns-italy-faces-eurozone-exit-coronavirus-crisis-deepens

    “Europe is doomed – the same reason European nations and people have been doomed to waging war with each other for millennia – because when one strips away the profit motive and the distraction that is the pursuit of wealth, everyone hates everyone, and once the money runs out and the shared prosperity ends and is replaced by the shared pain of bailing out one’s neighbor, at that point it’s just a matter of time before the time of death is declared.”

  4. Davy on Wed, 20th May 2020 7:08 am 

    “Fear Of COVID-19 Has Absolutely Destroyed America’s Future”
    https://www.zerohedge.com/personal-finance/snyder-fear-covid-19-has-absolutely-destroyed-americas-future

    “It took from the founding of our country all the way to 1981 before the U.S. national debt reached one trillion dollars. Incredibly, we just added more than a trillion dollars to our national debt in less than a month. On April 5th, we were 23.9 trillion dollars in debt, and by May 4th we were 25 trillion dollars in debt. Fear of the coronavirus has caused nearly all of our politicians to suddenly become socialists, and we are being told that trillions more in spending may be coming. This is complete and utter lunacy, and we are leaving future generations of Americans with a mountain of debt that would absolutely crush them. We are literally committing national suicide in front of the whole world, but we are so utterly consumed by our addiction that we don’t even realize that we should be deeply ashamed of ourselves.“

  5. whoa supremacist muzzies jerk i knew some wrong when a pretty little white girl ran to a black man arms dead giveaway deeeeeeeeeeeeeeeeeeed giveaway my neighbor got best testicles cuz we see this dude everyday we ate riiiiiiiiiibs with this dude on Wed, 20th May 2020 7:22 am 

    whitey supertard president tucker of foxnews is sayin’ china taking over everything in america.
    i for one welcome our new chinese overlords for amputating all their muzzies starting with muzzie imams. i disagree with everything else china does so don’t leave this sentence out and edit me like libnews media often do.

    day 27 ramadan bomathon 147 kabooms 657 went to see muhammad the pedifiler.

    nary a word on this

  6. Davy on Wed, 20th May 2020 7:36 am 

    “The COVID-19 “Dark Winter” PsyOp: Question Everything…”
    https://www.zerohedge.com/political/covid-19-dark-winter-psyop-question-everything

    “The only real defense that is valid during this exercise in mass tyranny is total refusal to comply with any and all government mandates. We are in the midst of the largest psychological operation (PSYOP) in the history of mankind. By questioning everything concerning this manufactured “virus pandemic,” the resulting attitude cannot leave anything other than extreme doubt, and doubt is what can bring the masses out of the dark and into the light. The newest term being targeted toward the masses is the coming of the “Dark Winter,” which is nothing more than propaganda based lies meant to prepare the sheep for a planned continuation and escalation of this fake pandemic in order to bring about world domination.”

  7. Abraham van Helsing on Wed, 20th May 2020 8:01 am 

    Europe is doomed – the same reason European nations and people have been doomed to waging war with each other for millennia – because when one strips away the profit motive and the distraction that is the pursuit of wealth, everyone hates everyone, and once the money runs out and the shared prosperity ends and is replaced by the shared pain of bailing out one’s neighbor, at that point it’s just a matter of time before the time of death is declared.

    Europe once really controlled the world, even when they were fighting each other. Everybody in Europe with a brain knows that if we don’t overcome petty nationalism, we are history and China can take over the entire planet. Always be on guard if Anglo anti-Europeans profess out future, or that ZH Bulgarian jew “Tyler Durden”. The reality is a little different:

    https://qph.fs.quoracdn.net/main-qimg-4de5d76fa5a4cc323fb55c9c69348c9b

    It is very well possible that that fair weather construct and US-vassal EU is going to be replaced by a more brutal, post-humanist Paris-Berlin-Moscow confederation, nuclear armed to the teeth.

    It is indeed also possible that Italy will be forced to leave the Eurozone. Europe is not going to bail out a nation of corrupt tax-dodgers, even right-wingers once had enough off:

    https://qph.fs.quoracdn.net/main-qimg-2f0f971cc0bef9f131cad37b1eb8db52

    But before that happens, Italy should pay good attention to the fate of Britain, or England rather, that Europe will set an example of, and perhaps will have second thoughts if NW-Europe offers to install a Troika, like happened to Greece, just to get Italian finances in order and force Italians to pay their tax bills, rather than leaving the euro and be forced to return to the lira, nobody in the world will accept, and the usual 10%/year inflation.

  8. JuanP on Wed, 20th May 2020 8:35 am 

    The COVID-19 “Dark Winter” PsyOp: Question Everything…”
    https://www.zerohedge.com/political/covid-19-dark-winter-psyop-question-everything
    “The only real defense that is valid during this exercise in mass tyranny is total refusal to comply with any and all government mandates. We are in the midst of the largest psychological operation (PSYOP) in the history of mankind. By questioning everything concerning this manufactured “virus pandemic,” the resulting attitude cannot leave anything other than extreme doubt, and doubt is what can bring the masses out of the dark and into the light. The newest term being targeted toward the masses is the coming of the “Dark Winter,” which is nothing more than propaganda based lies meant to prepare the sheep for a planned continuation and escalation of this fake pandemic in order to bring about world domination.”

  9. JuanP on Wed, 20th May 2020 8:45 am 

    estroyed America’s Future”
    https://www.zerohedge.com/personal-finance/snyder-fear-covid-19-has-absolutely-destroyed-americas-future
    “It took from the founding of our country all the way to 1981 before the U.S. national debt reached one trillion dollars. Incredibly, we just added more than a trillion dollars to our national debt in less than a month. On April 5th, we were 23.9 trillion dollars in debt, and by May 4th we were 25 trillion dollars in debt. Fear of the coronavirus has caused nearly all of our politicians to suddenly become socialists, and we are being told that trillions more in spending may be coming. This is complete and utter lunacy, and we are leaving future generations of Americans with a mountain of debt that would absolutely crush them. We are literally committing national suicide in front of the whole world, but we are so utterly consumed by our addiction that we don’t even realize that we should be deeply ashamed of ourselves.“

  10. whoa supremacist muzzies jerk i knew some wrong when a pretty little white girl ran to a black man arms dead giveaway deeeeeeeeeeeeeeeeeeed giveaway my neighbor got big testicles cuz we see this dude everyday we ate riiiiiiiiiibs with this dude on Wed, 20th May 2020 1:21 pm 

    i’m taking permanent retirement
    i’m never here

    happy supremacist muzzies bag day feb12021

  11. whoa supremacist muzzies jerk get that girl out of that house she simply has to get out so i open the door cant get in that way my body cant fit in the door only your hand on Wed, 20th May 2020 1:25 pm 

    i’m on permanent vacation, i’m never here, never have, not a pico second

    this is classical musics playing just filling the time, waiting for a big boom from muzzies ramadan when they get extra credit for killing

  12. whoa supremacist muzzies jerk i knew some wrong when a pretty little white girl ran to a black man arms dead giveaway deeeeeeeeeeeeeeeeeeed giveaway my neighbor got big testicles cuz we see this dude everyday we ate riiiiiiiiiibs with this dude on Thu, 21st May 2020 7:28 am 

    why whitey supertard president laura ingraham love muzzies?
    she said china bad amputating all their muzzies?
    who set agenda at foxnews besides supertard madcat?

    i’m confused

    muzzie is captured. muzzie was replacement for al baghdadi who was burried as muzzie by US navy at sea according to muzzie custom but it’s not a muzzie. It doesn’t matter if muzzie has a PhD in muzzying

    mind blown

    killing during peaceful ramadan continue 159 booms 686 went to see muhadmad the pedifiler, day 28

    beware muzzies going big kaboom at end of ramadan. muzzie gets extra credits during this time

  13. whoa supremacist muzzies jerk i knew some wrong when a pretty little white girl ran to a black man arms dead giveaway deeeeeeeeeeeeeeeeeeed giveaway my neighbor got big testicles cuz we see this dude everyday we ate riiiiiiiiiibs with this dude on Thu, 21st May 2020 8:26 am 

    whitey supertards presidents and (((supertards))) at CDC is now saying the muzzielove virus is just all about love. it doesn’t kill much.

    so are we going to finally amputate whitey supertard scientific supremacist “thunderf00t” already? i don’t like supertards using high british english to peddle fear and muzzie love

    i’ve been saying this from day one when whitey supertard scientific supremacist “thunderf00t” imposed self quarantine. I said it smellz

    string this whitey supertard up and slice off limbs going around the joint sockets to get at the connecting muscles.

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