Wednesday, March 25, 2020

The Most Colossal Debacle In The History Of Oil -- Saudi Threatening To Flood The World With Oil -- March 25, 2020


S&P Global Platt: Saudi wants to pump more way more oil than it ever has, a major test for Aramco. Summary:
  • Aramco says will pump at max 12 million b/d capacity
  • some doubt its ability to produce that much crude
  • finding buyers a challenge in distressed market
In a week's time [starting April 1, 2020], Saudi Arabia is set to turn its taps to the max and unleash a surge of crude oil that refiners increasingly say they don't want nor need.
But the kingdom has yet to prove that it can follow through on its plans to pump an unprecedented 12 million b/d of crude — almost 1 million b/d higher than it has ever produced before.
It is only recently recovered from last September's missile attack on its critical Abqaiq crude processing facility, and pumping at that volume will be a massive test of state oil company Aramco's capabilities and infrastructure.
"My sense is that they can do it but they need time to deliver the full capacity," said long-time Saudi analyst Bill Farren-Price, a director at consultancy RS Energy Group, adding that additional rigs would need to be hired to tap the kingdom's vast reserves. "The terminal and midstream capacity is there, but the wellhead capacity needs... at least 90 days to be delivered."
Saudi officials, piqued by Russia's rejection of an OPEC proposal for deeper production cuts to prop up prices, have ordered Aramco to supply a record 12.3 million b/d of crude starting April 1, flooding a coronavirus-impaired market that has seen oil demand collapse. Aramco has said 300,000 b/d of that supply will come out of its vast global inventories, leaving the remaining 12 million b/d to come from the ground, implying the company will be using its entire production capacity.
Much, much more at the link. Perhaps one of the best summaries to date where we stand.

We've been through this before. The article ends:
Saudi crude inventories have not swelled in preparation for an export rise, according to geospatial intelligence firm Ursa, standing at 100.2 million barrels as of last week, in line with the year-to-date average of 101 million barrels.
Saudi crude exports have also yet to accelerate, with March volumes averaging 6.84 million b/d, down from February's 7.19 million b/d, according to trade flow tracker Kpler.
Market realities may mean that whether or not Saudi Arabia is able to max out its production, its will to supply record volumes may run up against buyers' lack of appetite for crude.
Original Post

If everything below looks familiar, it is because I have re-posted an earlier post with new screenshots from twitter in the last 24 hours. The "shelter-in-place" orders now in effect will drop US gasoline demand to/by unprecedented levels which were never predicted in any modeling. It's impossible to predict how this plays out, but I am blown away by the timing of my original post yesterday.

From a contributor over at SeekingAlpha.
  • The reality will start to set in for everyone in OPEC+. Russian oil producers will be the first to refuse to increase oil production into a lower oil price environment.
  • With Brent trading at $27/bbl and the discount needed to match Saudi crude to Europe at $15 to $17/bbl, Russian oil producers will be forced to sell crude at close-to-breakeven.
  • But this sickening reality will start to hit the Saudis soon as well.
  • With the contango for month 1 and month 6 Brent trading at -$8.46/bbl, the Saudi OSP discount offered on top of this will guarantee profits of almost $20/bbl to any oil trading firm that has the infrastructure to hold the crude for just 6 months.
  • The takeaway from this is that this price war doesn't benefit anyone. The damage to the pocketbook will far outweigh any egos.
Something tells me Putin is not a bit happy with the Rosneft CEO who started this whole thing.

Two things with regard to my post yesterday.

First: immediately after opining that Saudi Arabia was not going to flood the world with oil as they threatened (for any number of reasons), "analysts" over at twitter started saying the same thing. See below. The country to watch today: Saudi Arabia. 

Second: the OPEC+ spat (Russia vs Saudi Arabia) has to be one of the most colossal debacles in the history of oil. Russia has blinked. The House of Saud in a fight for its very survival. Fifteen-thousand princes know that it was MBS' decision alone to flood the world with crude oil. And here we are: modeling suggesting that Brent will go well under $20/bbl. 


March 25, 2020:

March 25, 2020:

Later, 10:41 p.m. CT: isn't this interesting? After posting the note below three items from twitter:
  • "Russia no longer considering adding production."
  • "So Saudi are not ready to go to 12.3 mbpd. Also suggests they will have increase Ghawar production to achieve it. Will be interesting to see how the 70-year-old field handles the extra stress over long periods."
  • "Saudis seek to speed up repairs at Abqaiq complex."
    • you mean to tell me this complex has not yet been fully repaired; the attack was six months ago
Original Post

Before we get started:
  • Saudi Arabia reported 205 new Wuhan flu cases in the past 24 hours (March 24, 2020).
  • The day before, Saudi Arabia reported 51 new cases in 24 hours (March 23, 2020). 
  • That's a four-fold increase in one day.
  • The number of cases is obviously severely under-reported. 

Facts or at least what I think are the facts (folks can fact-check me on these). Maybe I should call these observations:
  • Saudi Arabia and Russia were quibbling about less than a million bopd one way or the other
    • the argument was whether to extend the quotas after they expire at the end of March, 2020 (one week from now)
    • the argument was less about the quotas (and price) and more about protecting one's market share
  • a digression:
    • 30% of the market share at $70/bbl vs 35% of the market share at $20/bbl -- but we need to move on
  • Saudi Arabia's budget is based on $83-oil and that is after a cut in the budget; 
    • much evidence that the kingdom has been in financial difficulty for several years, maybe starting in 2014 (previously posted)
    • at one time, not many years ago, Saudi Arabia's budget was based on $100-oil;
    • Saudi Arabia cannot print rials (as opposed to the US which can print dollars) -- actually the country can print rials but you get the point
  • so far, no increase in crude oil has reached the US from Saudi Arabia;
  • to meet its export goals, Saudi Arabia will first empty its crude oil storage tanks;
  • after Saudi crude oil in storage is exhausted, Saudi has to increase production to:
    • increase exports by one to two million bbls /day to achieve its rhetoric to flood the world with oil;
    • increase production for domestic use (occurs every summer to run air conditioners)
    • increase production from the fields to replace oil for storage
All of this just in time for Wuha flu to hit the mideast. Saudi often fell short of production goals in the best of times; it will be interesting to see what the kingdom can do with the threat of Wuhan flu looming.

It's hard for me to believe that the world will remain in "lockdown" past April 30th. If the world returns to normal / begins to return to "normal" by May 1, 2020, oil demand will increase significantly.

At that time, one could see:
  • max oil demand in the US; summer driving season; economy gets back on track;
  • US injects $2 trillion in stimulus;
  • China injects $7 trillion in stimulus;
  • Saudi storage depleted;
  • Russia can't make up the difference (for any number of reasons);
  • Saudi production stressed (see above)
Disclaimer: I am inappropriately exuberant about the Bakken. 

The above will be added to "how we got here," linked at the sidebar at the right.

Wuhan flu is tracked here


  1. That SA writer, HFIR, is one of the silliest. Has been telling people every year that oil would be 80+. Huge record of failure.

    Within this piece, he makes the error of thinking the Saudi OPS in the news stories is an actual price. It is not. Several Asian refineries tried to buy Saudi oil and do exactly the time-arb trade that he discusses. And the Saudis wouldn't really sell it to them. This has been well documented. But HFIR misses it.

    1. Like the Saudis and the Russians, you are quibbling over "trades" that are inconsequential in the big scheme of things. For traders, you are quite correct, but whether Saudi oil is selling for $10, $20, $30 it hardly makes a difference. Saudi is in a fight for its very survival.