Monday, April 20, 2020

Oil prices actually have not collapsed

If you've been alarmed by the headline "Oil plunges below $10/bbl," don't be.

Chart #1
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It's only a temporary phenomenon, brought on by the sudden collapse of oil demand (see Chart #4 in my previous post for more info). As Chart #1 shows, it's only the front-month oil contract (yellow) that has plunged. The December '20 contract (white) has actually been rallying since its March 18 low. The problem is a lack of storage, which has forced those were long the front contract to get out of their position (i.e., sell) since they have nowhere to store the oil that will be delivered to them per the terms of the about-to-expire contract. The price of oil per future contracts has remained relatively stable, averaging about $30.

The bottom portion of Chart#1 reflects the spread between the front-month contract and the December '20 contract. That spread is by far the largest that has ever occurred in decades, which is befitting the fact that the plunge in oil demand has never been so severe and so sudden. 

25 comments:

  1. Aah...of course that makes complete sense especially given that energy stocks haven't moved that much. thank you

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  2. Come on CBP saying that it has collapsed makes much better headlines. Although Canada's oil prices did (futures) drop in the negative territory for a few minutes. Still, Oil institute seems to think that total global demand has dropped somewhere around 36 MM bbl per day. Which is substantial

    Even the strategic Reserves are nearly full (with only about $3 billion in spare capacity)


    Don't underestimate the value of overestimating a headline

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  3. The May crude oil contract closed today at the knock-your-socks-off price of -$22.30. Yes, minus $22.30—just a tad bit more than a "collapse". Those long the contract and unable to take delivery because there was no storage capacity left were apparently forced to pay $22.30 per barrel to those who were short the contract. That is a first-in-a-lifetime event for the oil market, to the best of my knowledge. And it is noteworthy, because if oil prices really had fallen by so much, it would have caused to collapse of many oil producers and their bonds.

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  4. Exactly. The market barely blushed at this oil "collapse". Its all storage and supply chain.
    Haliburton was up. XLE was down only 3%. Not quite as dramatic as 300% drop in tomorrow's May WTI contract.
    Similar to other commodities with storage and supply chain disruption.
    Farmers pouring out thousands of gallons of milk, and throwing millions of perfectly good chickens into landfills.
    That will balance out. Market knows it.

    Meanwhile the stock market didnt even give up all of Friday's gain, and NYSE trading volume was down a whopping 43% on today's pullback. Excellent behavior.
    I was up today, and am positive YTD. Relative Strength wins again.
    Bought more stocks today, but too early in the day.

    Florida Gov. opened JAX beaches for 3 hours on Friday, and over 20,000 got out there, instantly.
    This country is ready to blast off.
    Georgia and Tennessee set to open, ASAP.
    Georgia opening on Friday, Tennessee on April 30.

    Wish my 36 gallon pickup tank wasnt full so I could get some cheap gasoline!

    Sick & Elderly need to stay home. I will bring you a sandwich. STAY SAFE!!

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  5. This reminds me of Trump/WSJ article last week about Trump's Art of the Deal" for increasing cuts from 10MM to 20 MM bbl per day, which agreement lasted all but one day..if that! Now the future's market is the art of the deal, the cold reality that virtually all channels are stuffed with the black stuff as the world economy grinds to a halt.

    Interesting that copper has not crashed yet, granted its easier to store but still. Those who want to re-start the economy have a point (not a very good one) that the world economy is crashing.

    interesting times

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  6. It's interesting that those with storage capacity in Cushing haven't sold deferred contracts to lock in a profit. Perhaps they already have or the storage costs are more than the spread...

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  7. Andy:

    Some of those guys who hold storage capacity in Cushing are probably physical traders with inventory...

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  8. December Oil futures are breaking below March lows

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  9. Great piece:
    https://www.collaborativefund.com/blog/whats-different-this-time/

    Key excerpt:

    "My guess is if covid-19 struck the world in 1920, it would be a single page in the history books about yet another deadly pandemic wedged in between a long list of common tragedies. But since it happened in 2020, it will be a generation-defining event that fundamentally reshapes how we think about risk."

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  10. Given the price of oil, what about a federal excise tax on gasoline to pay for some of the CV19 bailouts? 90 day sunset (no extension), pegged to the price per barrel. ie. 25 cents/gallon when oil is below $30 a barrel, a sliding scale until 0 cents at $50 barrel. Just spitballing here, thoughts?

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  11. https://www.forbes.com/sites/jimcollins/2020/04/20/the-us-oil-etf-uso-is-the-culprit-behind-oils-massive-plunge/#75ad9b6724e8

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  12. https://www.npr.org/2020/04/23/841962976/trump-didnt-see-it-coming-coronavirus-deaths-increased-tenfold-this-month

    It is now blatantly obvious that the latest estimate of 60,000 C19 related deaths is too low. We're at 47,800-and counting. New daily cases are holding steady at nearly 30,000-which admittedly is wildly inaccurate. IF we get a second wave in the fall we could absolutely reach 100,000. And this is with QUARANTINE! Without it, who knows? I do not see any appreciable easing anytime soon. I'm not sure what the market "expects" but if it expects normality anytime soon it is in for a rude awakening.

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  13. Steve said:

    >It is now blatantly obvious ...

    There are a few things that should now be blatantly obvious.

    Among my favorite is the hydroxychloroquine farce. A few weeks ago Trump and Fox News were touting it incessantly. No one paid attention to the fact the CIA advised its people not to use it. Where now, friends? Scott, as I recall, you didn't say this might be a treatment, you said: "We now have a very effective treatment protocol for covid-19. This renders obsolete all previous projections/forecasts of the disease's evolution." Got to love it.

    Another is how wise the Swedes were. Well, Sweden has 192 deaths per million of population, while neighboring Norway and Finland have 35 and 31, respectively. Not sayin' the Swedes were wrong, just sayin'...

    Oh, and how about, "This is no worse than a seasonal flu." The estimated average deaths per season over the past 10 years is 37,642. Where are we today, Steve? 47,800? The average estimated upper range of the 95% CI is 54,300, which we are fast approaching.

    I think a lot of the extremely dire predictions were off, no question about that. But as you allude to, the quarantines and social distancing were almost certainly part of keeping those predictions at bay.

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  14. Steve -

    Yeah. I'm pretty tired of Covid coverage in most publications being focused on Trumps failures. No question his communication as a leader in a crisis is awful. Almost worthy of removal. But as far as I can interpret, the actions taken with the information known are within the bell curve of lots of mistakes in a crisis. I wish the political opportunism would go away. But even that is largely Trumps fault for his ego problems.

    Anyway, the more relevant point... There was an article, I think WSJ, that expressed the opinion that the best way to measure the true effect of COVID was deaths from ANY reason. The argument being that deaths are statistiically projectable. If they are up measurably, for any reason, it's because of the COVID impact. I wish I could find the article, but now I can't. Anyway, many of us are suspicious of COVID specific death statistics and fatality rates. But deaths for any reason ARE up statistically significantly. Only time will tell us if we are pulling future nearby certain deaths into this year. But all that persuaded me more that this isn't a nasty flu.

    I'm also sensing more people starting to realize we may not have anything close to normal for a while, maybe years. A vaccine may or may not come for years. This very possibly may be a chronic illness that has to be dealt with for years to come. The likely best hope is fairly effective treatment combined with continued social distancing of some sort, and isolation for the most at risk. We might be going through the 5 stages of grief. We've hit denial and anger, now rolling into bargaining and depression.

    That's not a concession that blanket lockdowns in all communities is the right thing to do now. It's time to experiment with ways for the healthy, in healthy communities, to transition back into the real world to some extent. We have to do that because there are NOT any miracles coming soon. We might have to figure out how to live with this for a while.

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  15. randy said:

    >There was an article, I think WSJ...

    That's a really interesting idea. I know that some people think COVID deaths are being exaggerated, while others think they are being under reported. If the idea in that article is sound, it could really help clarify things (at least to some degree).

    >I'm also sensing more people starting to realize we may not have anything close to normal for a while...

    I think you're right. I've spent my entire life with a sense of almost unlimited opportunity. In particular, I always thought I could just pick up and go...do anything I wanted. I was telling my wife that now I feel as though we were in a game of musical chairs, and the music has stopped. We were lucky and got a chair, but where we are right now is probably where our destiny lies for the foreseeable future. It's a very, very strange feeling.

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  16. Randy, you make an excellent points re measuring C-19 related deaths. Pretty sure that was a WSJ piece as I also remember reading it. I'm more optimistic though. We have the BEST technologists in the world who are working assiduously towards the same thing and it belies credulity for me to think we will not have a mass produced vaccine inside one year-maybe by end 2020. That said, life will be a PITA until then.

    Example; we fly back north in three weeks-through Logan airport, perhaps the new epicenter of C-19. We pick up our car and drive to NH, go shopping and then-QUARANTINE. My wife hasn't seen her 91 year old mother since Christmas so she'll see her while I see my son, daughter in law and new grandchild. Then QUARANTINE again so we can see our youngest daughter who is off to do an internship at SpaceX in TX (way safer there than Boston!). Then QUARANTINE again so our son's family can visit us throughout the summer at our lakehouse.

    Not to mention trying to see our three kids in SEA.

    Good grief.

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  17. steve said:

    >it belies credulity for me to think we will not have a mass produced vaccine inside one year-maybe by end 2020...

    Not that HIV and the coronavirus are in the same league, but just think how long we've had HIV around and not been able to come up with a vaccine.

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  18. Well, to quote Dawg, "time will tell".

    At the risk of walking in the steps of our illustrious leader;

    https://nypost.com/2020/04/23/coronavirus-vaccine-enters-human-testing-trial/

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  19. Here's a possible case of unintended consequences in the making...

    The coronovirus is projected to deplete the Social Security trust fund this decade.

    Conservatives will rejoice. Except...

    The millennials are already showing a propensity not to spend. FIRE (Financial Independence, Retire Early) is a buzzword with them. When it becomes crystal clear that there will be no social security for them and the follow on generation, this disinclination to spend -- but to save -- may go into overdrive. Which will, in turn, slow the recovery and keep the economy on lukewarm.

    Time will tell.

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  20. randy said:

    >There was an article, I think WSJ, that expressed the opinion that the best way to measure the true effect of COVID was deaths from ANY reason. The argument being that deaths are statistiically projectable...

    You know, at first glance this seemed reasonable. Then I started thinking about it, and realized that people are now driving less, hence there might be significantly fewer automobile deaths. So I Googled, and found this article. It's admittedly a small snapshot, and it's a few weeks old, but it's worth thinking about in the context of the article you cited...

    New study finds coronavirus lockdowns dramatically cut traffic accidents and fatalities

    Then I wondered about homicides. So I Googled and found this article...

    Miami Has Recorded No Homicides in 6 Weeks Despite Deliberate Decline in Police Enforcement

    Again, a very small sample size and not necessarily something you'd want to extrapolate from without a more detailed examination.

    But I think you get my point. Under the current coronavirus lockdowns, there are actually certain causes of death for which it is possible the numbers are going down...perhaps significantly.

    So I think that need to be factored in before measuring deaths for ANY reason.

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  21. It's 10:00 pm here in Paris, and I'm going to bed.

    As I write this, the total number of deaths from COVID-19 is estimated to be 49,221. I expect when I wake up tomorrow it will be damned close to 50,000, if it hasn't already surpassed it.

    In context, according to the Centers for Disease Control, the average estimated upper limit to the 95% CI for flu seasons over the past 10 years is about 54,300.

    And the total number of American deaths during the Vietnam War was 58,220.

    We're not out of the woods yet.

    Some early hard-hit areas -- like the northeast -- seem to be slowing down. On the other hand, I have read that it's now taking root and spreading quickly in some of the more rural states of the deep south, the mid-West, and the Great Plains. And although I could be wrong, I don't think those states are as well prepared as the first-hit states in terms of medical infrastructure.

    And that wonder drug hydroxychloroquine? It appears to have been a bust. At least I don't hear Donald Trump and Fox News touting it anymore.

    So to those who have been insisting that this is no worse than a typical flu season...well, it's a little too early to draw hard conclusions, but it's starting to look as though that might have been just a tiny little bit too Panglossian.

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  22. Rick

    Total death per WHO is 188,950 -- total death as of 7 pm EST in the US is 48,985


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  23. FitN,

    My bad, I was just speaking of the U.S. Should have been clearer.

    Per World-o-meter, at 12:15 am EST on 24 April, total deaths in U.S. is 50,243.

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  24. Following is a link to a story from last week's WSJ. The story chronicles a new publication by Dr. John Ioannidis of Stanford University who is one the the foremost authorities on analysis of medical research. His publication concludes in the case of COVID there is far too much reliance on hypothetical modeling / attention grabbing headlines, and far to little attention being paid to hard data. In looking at the actual data Dr Ioannidis makes the same conclusion as articulated by Scott Grannis ... fatality rates comparable to the flu. The best quote form the story is “My [Dr. Ioannidis] is not bullet proof, ... But dismissing real data in favor of mathematical speculation is mind-boggling.”

    https://www.wsj.com/articles/the-bearer-of-good-coronavirus-news-11587746176?emailToken=1d819c4ce6dedccf8c2c6f56493661244axATEkhK9k8fNufAduc7vrC6GaHD3ir1VLck1sSDt5k/VYccbxV1V+0JW2YdZxFT3B7Elw1oWLBVh8KJucKmQ%3D%3D&reflink=article_imessage_share

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  25. Re US deaths: it is likely that US deaths from Covid-19 are being over-reported, since it has come to my attention that Medicare is paying hospitals more for covid-19 patients than it is for the average patient.

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