Tuesday, April 21, 2020

Negative WTI Price -- Explained -- April 21, 2020

This was posted as a comment at this post:
My friend sent me this.....I thought it was well explained...You are all seeing the news flash talking about oil price going negative. So here is a very brief simplified explanation for what's happening

1. Most of the oil is traded via Futures Contracts. There is a Spot Price as well, which is taken into account while arriving at the "theoretical futures price"

2. There are two main Futures Contracts (remember this is simplified) - The WTI and the Brent

3. WTI refers to the Oil from North America, while Brent refers to oil from Middle-east, Europe and Russia

4. There are a million variants, but we will omit those for the moment, since they complicate the discussion without really adding any clarity

5. The "Oil Price" that's gone negative is the settlement prices for the May 2020 Delivery Contract (ONLY THAT ONE)

6. Some more complexity - There are two forms of settlements for Crude Oil Futures Contracts (and for most commodities), viz Net Settlement and Physical Delivery

7. Net settlement allows the buyers of the contracts to settle the financial difference between the buying price and the settlement price

8. If a buyer of a Futures Contract doesn't opt for net settlement on or before the "Notice Date", which passed last week for the May 2020 Delivery, then they are assumed to be taking physical delivery of the underlying quantity of Crude Oil

9, And that's the "technical problem" that's pushing the settlement price of May 2020 Delivery Contracts to become negative. There is a buyer, or a series of buyers, who are stuck with physical delivery option that they can't actually use, ie they can't take physical delivery of the underlying crude oil because they don't have the storage capacity to store this

10. The negative price indicates that they are getting some buyer, probably a refiner, or a storage facility or a driller, to take the delivery off their hands by PAYING them to buy the oil that's ready for May delivery

11. It's never happened before in the history of Crude Oil Futures trading. It's a very unique situation

12. However, the June delivery WTI futures are still trading in positive territory at $20+/ BBL. And the Brent Futures for June 2020 delivery are trading at $25+/ BBL

13. Will this have implications: surely so. It means that the US Crude Oil producers are now facing a glut and if they don't stop drilling, they will have to give the oil away free, and/or pay people to buy that oil.

14. This oil can't be dumped or disposed off, since that will cause an environmental disaster and result in billions of dollars of penalty (Exxon Valdez, Deepwater Horizon, etc.)
My comment regards point #13: would that "conclusion" still be true if the US banned all oil imports (all imported oil from OPEC, from Mexico, and from Canada)?
Would that "conclusion" still be true if the global economy returns to "normal" within the next couple of weeks? Would that "conclusion" still be true if OPEC+ cuts global (non-US) exports by another 10 million bopd? Would it be better to say that US oil producers need to decrease production, not "stop drilling." In the Bakken, wells can be drilled, but not completed (fracked). Would that assessment still be accurate if all "stripper wells" were plugged and abandoned? Would that assessment still be accurate if all off-shore production was curtailed? Many, many more questions/comments but one gets the point.
In the big scheme of things: is not this quite remarkable? Under many administrations, beginning at least with the Carter administration, if not before, we were repeatedly told that we would soon run out of oil and that was the primary reason for alternative sources of energy, including renewable energy. "Global warming" came later. Wikipedia has never updated the entry on the Hubbert "peak oil" theory.

If you ever want to find this clip quickly, search "doofus":


OPEC Basket Pricing Below $15/Bbl -- April 21, 2020

OPEC Basket, link here:

MRO CEO: wants US state regulators to "stand down"; let the "market" handle this "crisis," link at Dallas Morning News. MRO is a "major" operator in the Bakken, as well as the Permian.

Back to the Bakken

Note: in a long note like this there may be typographical and content errors; if this is important to you, go to the source.

Active rigs:

Active Rigs3063594929

Two new permits, #37528 - #3729, inclusive -- these two permits were posted yesterday at the blog based on data from scout tickets -
  • Operator: Crescent Point Energy
  • Field: Dublin (Williams)
  • Comments:
    • Crescent Point Energy has permits for four Pancake wells according to the daily activity report, but the scout tickets spell these wells as "Pankake" wells; SESE/SWSE 31-158-99; Dublin oil field; 
Nine wells approved for confidential status:
  • Whiting (7): seven Wold Federal wells in McKenzie County;
  • Hess (2): one TI-Ives well, and one TI-Blestrud well, both in Mountrail County
Wells with name changes:
  • 17864, Slawson, from Jughead to Jughead Federal
  • 27892, CLR, from Jersey to Jersey FIU
  • 30259, Hess, from ....0706H-1 to ... 0705H-1
  • 36122, Slawson, from MLH to TFH
  • 36126, Slawson, from MLH to TFH
  • 36672, Equinor, from TFH to H
  • 36676, Equinor, from TFH to H
  • 37291, CLR, from 19H to 19H1
  • 37292, CLR, from 19H1 to 19H
  • 37368, Petro-Hunt, from 159-95 to 159-94
  • 37370, Petro-Hunt, from 159-95 to 159-94
  • 37372, Petro-Hunt, from 159-95 to 159-94
Four permits renewed:
  • Bruin: one Ann H. Thome permit in Williams Count; two Diamond permits in McKenzie County; and, one Forest USA permit, also in McKenzie County
Crawfish Season 2020

Crawfish dinner #2.

Initial Production Data For Three Kraken Wells That Came Off Confidential List Today -- April 21, 2020

The Kraken wells are tracked and updated here

The wells:
  • 36652, 897, Kraken Operating, Red 22-15 1H, Burg, t11/19; cum 100K 2/20; 60 stages; 10.2 million lbs; TD = 20,185 feet; middle Bakken, 9,631 feet (TVD);

DateDaysBBLS OilRunsBBLS WaterMCF ProdMCF SoldVent/Flare
  • 36651, 1,017, Kraken Operating, White 23-14 1H, t11/19; cum 108K 2/20; 60 stages;10.2 million lbs; TD = 20,420 feet; middle Bakken, 9,638 feet (TVD);
PoolDateDaysBBLS OilRunsBBLS WaterMCF ProdMCF SoldVent/Flare
  • 36650, 779, Kraken Operating, Blue 26-35 1TFH, t11/19; cum 91K 2/20; 60 stages, 10.2 million lbs; TD = 20,557 feet; middle Bakken, 9,741 feet (TVD);
PoolDateDaysBBLS OilRunsBBLS WaterMCF ProdMCF SoldVent/Flare

Kraken Reports Three Very Nice Wells In Tier 2, Bakken Fringe -- April 21, 2020

WTI: spikes 114%; up $43/bbl

Back to the Bakken

Active rigs:

Active Rigs3063594929

Four wells coming off the confidential list today:

Tuesday, April 21, 2020: 31 for the month; 31 for the quarter, 286 for the year:
  • 36652, 897, Kraken Operating, Red 22-15 1H, Burg, t11/19; cum 100K 2/20;
  • 36651, 1,017, Kraken Operating, White 23-14 1H, t11/19; cum 108K 2/20;
  • 36650, 779, Kraken Operating, Blue 26-35 1TFH, t11/19; cum 91K 2/20;
  • 33624, drl, Slawson, Gunslinger Federal 7-1-12TFH, Sand Creek, 
RBN Energy: yesterday's crude price meltdown, futures contract expiration and crude storage.
We have now entered the crude oil twilight zone.  Never before has crude traded below zero, much less at the absurd level of negative $37.63/bbl.  There is no doubt that demand for crude and motor gasoline are far below crude production volumes, leaving the market vastly oversupplied.  But could it really be this bad?  When you are talking about the market for physical barrels, the answer is “no”.  It is bad.  Really bad. But what happened yesterday had more to do with the mechanics of futures contracts and how they transition from month to month, than a complete mega-meltdown in physical barrels.  That is not to say that negative prices for physical barrels are not already a fact of life in some locations. But negative $37.63/bbl?  Something else must be going on. So, to put yesterday’s bizarre market action in perspective, we need to get into a few details on futures contract mechanics, and then look forward to what may be coming over the next few weeks.  In today’s blog, we discuss the factors that are driving such extraordinary crude market developments.
Let’s start with what happened yesterday. The historic crash in the front-month price of WTI deep into negative territory was shocking, but some sort of collapse was not a total surprise to many players in the industry.  It was a timing thing, related to the way futures contracts roll from one month to the next. The expiry of the May futures contract later today — Tuesday, April 21 — means that, as always, the spot price for WTI at Cushing will “converge with” the May futures price, and a few players with long positions (i.e., contracts to buy crude) apparently held on too long and found it excruciatingly painful to exit their positions. For the past few weeks, as U.S. refinery demand for crude was cratering and storage in Cushing and along the Gulf Coast was filling up fast, the spot price for crude had already fallen to the mid-to-low teens, well below the front-month contract. On Monday, traders still left holding futures contracts promising to buy barrels of crude for May delivery but with no place to go with the physical barrels found themselves with no one to sell to.  Most of the buyers had disappeared.  And the only ones left insisted on being paid to take out the positions. That meant buyers getting paid to take barrels.  So the price of crude crashed to an unprecedented negative $37.63/bbl.
Crawdad Season