COVID-19 and Oil Price

roland-clarke

Roland Clarke, PhD CMVP CRE, Energy Management and Policy,

What does COVID-19 have to do with oil prices?

At refineries, planners and traders forecast how much crude to buy based on forecasted demand. Those forecasts would normally be off by plus or minus a few percentage points.

As the time of future deliveries, demand is now known and last minute decisions are made to either buy/sell a small percentage of oil in order to balance demand and supply.

The last minute decisions can only be done on a speculative open market.

In the current COVID-19 scenario, the sudden in demand has resulted in refineries not taking massive amounts of crude.

This not withstanding that refineries would have some storage. Privately owned “tank farms” together with oil tankers would also provide a limited storage buffer for the markets. However these storage options may not be enough in the short term.

The current COVID-19 scenario unfolded in less than one month, a shorter period than the term of the traded contracts. Storage became constrained and something had to give.

Any trader left stuck with extra oil on their hands would have to pay storage buffers to off take the unwanted oil. That’s why market prices went negative

Policy Questions:

1. Should the terms of the oil trading future contracts be shortened to be less than one month?

2. Should nations agreed to a more phased and slower shut down of their economies in order to better manage the constrains?

3. Should pandemic related force majeure clauses be included in oil contracts?

— By Roland R. Clarke PhD CMVP CRE, Energy Management and Policy, University of Pennsylvania 1995.

40 comments

  • Vincent Codrington

    Wuh Loss !!!

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  • How many “months” before we see a reflection at our pumps??

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  • How many months before we see a tax policy that forces aggressive adoption of alternative energy in vehicles, households, businesses and government..

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  • Vincent Codrington

    @ David BU
    Who approved the alternative policy strategy? Where is it documented?

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  • Vincent Codrington

    Correction. “alternative energy strategy.”

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  • @Vincent

    The blogmaster is asking for friend.

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  • Vincent Codrington

    Tell the friend that policies/strategies have to be weighed on economic efficiency scale. We must ensure it is fitted to Barbados’ unique situation. We have to strike a balance . There are competing demands for,land , labour,finance and human well-being. No need to rush the brush. Put the citizens first. Every thing else will fall into place.

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  • I tired asking for an alternative energy plan to reduce the FX demand on imported oil. That will undoubtedly go on the back burner now for government with oil under $20 a barrel. After all we plan for the minute when it comes to alternative energy and agriculture. Don’t mind these too sectors have the greatest potential to save us FX going forward.

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  • We get into too much semantics and unnecessary intellectual discourse especially when submissions are made by intellectuals eventually overlooking as in the case of Barbados the simple question as to why with the significant decrease in the cost of oil
    Why have we not seen a decrease in price at the gas pump?
    There should have a been concerted approach to the Government by BU contributors on this issue

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  • Vincent Codrington

    @ John A

    Is saving/ earning foreign foreign exchange the ultimate objective? Or an intermediate financial objective? What is the real purpose ? Should we not concentrate on the well being of our citizens? What level of per capita national Income can be generated in this closed economic system you are aiming to construct? Even in 1627 the aboriginals could not build an economy on Barbados. What did they know that is escaping our pseudo -intellectuals?

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  • @Vincent

    An interesting last comment delving into the philosophical. Who should determine what is best for the country and its citizens? Where does the influence come from anyway.

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  • Vincent Codrington

    @ Charles Skeete at 10 :20 AM

    I agree with your observation 100%. I think,as one regular blogger, admits many come here to engage in idle conversation. In my younger days we would describe it as ST.
    To answer your question. The engagement in hedging backfired. If one locks in at a high price one cannot expect to benefit from an unanticipated steep drop in price. We like to engage in new games without considering the down sides. In life there are no free lunches. We should stop looking for these.

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  • @ Vincent.

    I think post covid all economic rules will be revised. With the fall in tourism there will be a fall in FX receipts that we know. So if we proceed on the premise of a USD saved is one earned, we need to focus on what can we do for ourselves to make us A. More self sufficient and B become less dependant on the FX from a falling toursim industry.

    Alternative energy is a for us a God given gift in our climate and the fact that year around we benefit from roughly a 12 hour day between sunrise and sunset.

    Agriculture likewise is a no-brainer. Our ancestors basically grew enough to feed themselves. I am not suggesting we aim to be an exporter of agriculture, but instead an import substitutor of a select range of items we can grow locally but currently import. In other words a researched and targeted approach aiming at cutting say $100M out of our food import bill over a 2 year period. Once that is done we review the items being imported and set another goal.

    The way I look at it and what this virus has brought to light, is that dependence in a time of crisis is a bad thing. We will never be to stop importing we know that. We can however in a targeted way drop our imports and increase our Independance on imported items considerably, if we decide to do more than offer lip service of course.

    Oil will not stay below $20 for ever. But the energy we can provide using alternative energy will remain with us, barring another ice age of course. We should be taking advantage of the cheap oil now by locking in on price, but we should also be using those savings to promote a solid alternative energy base now as well.

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  • @Vincent

    Even if the ball was dropped with hedging we have storage capacity issues on the island that should limit the risk.

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  • Last week some of the US oil producers were paying traders to take the oil away, so as they can continue producing.

    Because with shale oil once production is shut down it is very difficult to restart again.

    That is what is referred to in this article as negative pricing, “That’s why market prices went negative”

    A useful article but not very informative in the way it is written.

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  • Vincent Codrington

    @ David BU
    I never said any body dropped any ball. We made a decision to lock in prices and it explains the failure to benefit from an unusual dip in the price of oil. Were they not instructed to do so by persons who do not know the limitations of hedging.
    David how about learning to live with risks. Risks are an essential part of life. Regardless of storage capacity, storage tanks eventually become empty and storage facilities cost money.

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  • Shaling companies between 2012 to 2017 lost billions with oil at an average of $50 a barrel. There was an article in the Washington Post on it a while back. Some specialist in that field say they need oil at over $80 a barrel for it to make sense.

    Liked by 1 person

  • Vincent Codrington

    John A at 11:08

    That is how the international capitalist system works. Surely we knew this since the first oil crisis of 1973.

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  • @ Vincent

    One would of hoped so, but it appears once the immediate crisis passes many just move on as if it will never happen again. I like you wonder how much our leaders have really learnt from the past. I really hope this virus brings true change to our economy and creates one where greater Independance is pursued.

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  • @Vincent

    A man in your line of business know there is inherent risk embedded in everything BUT based on the appetite for risk mitigating controls are employed. Agree with your main point, risk is always with us.

    Liked by 1 person

  • @KS

    The last word we were told is that the government purchases 3 months of fuel at a time. Now mind you we are never told when the actual purchase occurs though.

    Liked by 1 person

  • Those who believe that petrol will soon become cheaper share the belief of the naive local masses. Neither the government nor Baron Kyffin has any interest in this. The government needs the money to feed the numerous civil servants, Baron Kyffin for new palaces.

    It is more likely that the new Covid council, led by Chris Sinckler, will raise the price to $5 to $6 a liter to fix the government finances. Let the locals walk or ride their bikes, they will think.

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  • I didn’t know that, was interesting reading about the affect Covid-19 has oil prices. Thank you

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  • Oil trending below 15.00.

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  • fortyacresandamule

    The negative price for oil last monday was mostly a paper loss for the speculators. A few producers get a beating on the spot market, but most producers hedge their physical output months in advance . The Mexican government is legendary when it comes to hedging. Right now they are laughing all the way to the bank.

    Liked by 1 person

  • fortyacresandamule

    Fundamentally, the price of oil is mostly determined by the trading behavior of the speculators on the oil future exchanges ( NYMEC, ICE). Those traders have no intention or infrastructure to receive the physical commodity. They are just trying to make money on just pure price movement.

    Liked by 1 person

  • fortyacresandamule

    Those future exchanges along with other trading platforms is no different from vegas. The modern financial system today can either be described as a giant pyramid scheme or a giant casino.

    Liked by 1 person

  • @fortyacresandamule

    There is no place in your book for the oil speculators?

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  • fortyacresandamule

    Speculators are here to stay. Man is an economic agent. It’s human nature to try and exploit arbritage within any economic system, even if its an artificial created one. What I despised about the system is that theses are the people who are determining price discovery in the system and not the genuine investor or trader. Speculators are not interested in the fundamentals of the market. Take the future market of crude oil for example, only about 3% of the traders on that platform are interested in receiving the physical commodity.The other 97% are pure speculators. They drive the volume of trades and thus price discovery.

    Liked by 1 person

  • Man is an economic animal? Is this the economic man theory all over again? I thought we had buried that?

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  • fortyacresandamule

    @ David. The price of oil that get quoted daily on the exchange is for a specific grade at a specific location. The two most traded grades are the WTI and the brent.The WTI grade is a specific( light and sweet) USA oil that is stored and exported from Cushing, Oaklahoma. Light oil is oil that flow freely, while sweet oil is oil with a very low sulphur content. The Brent, also light and sweet, is a grade of oil found in the North Sea. The Brent is used as the international benchmark since it is not landlocked like the WTI in Oaklahoma. Oil comes in many many grades and the cost of production varies widely. And each grade of oil sells for a different price. Some will even sell for a premium above the price of WTI or Brent or at discount below WTI or Brent.

    The daily price of oil quoted on the future exchange is just a base referenced price used by producers in their formula pricing.

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  • @fortyacresandamule

    Thanks for the education.

    On a related matter, where does it put our interest in exploring oil offshore?

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  • Interesting side story. Our neighbour maybe playing with fire.

    The Aldan loaded last week in neighboring Trinidad and Tobago, Refinitiv Eikon data show. It has not transmitted a signal with its location since April 22, according to the data.
    Venezuela has received a 150,000-barrel shipment of gasoline from a company owned by shipping magnate Wilmer Ruperti,….The shipment from Ruperti’s company, Maroil Trading, arrived on Friday evening aboard the Aldan tanker to the port at central Venezuela’s El Palito oil refinery…The Aldan loaded last week in neighboring Trinidad and Tobago, Refinitiv Eikon data show. It has not transmitted a signal with its location since April 22, according to the data.

    https://in.reuters.com/article/venezuela-gasoline-imports/venezuela-receives-gasoline-imports-from-shipping-magnate-amid-fuel-shortage-idINKCN22908S

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  • The market is in super contango so it makes sense to go long futures and sell at spot price. Even after accounting for storage costs there was still money to be made from this trade. That is why there was a storage crunch.

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  • The market is in super contango so it makes sense to go long futures and sell at spot price. Even after accounting for storage costs there was still money to be made from this trade. That is why there was a storage crunch.

    Actuall wrong way around. Should be buy spot and sell at futures price since the futures contract price is higher than what could be had in the spot market today.

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  • fortyacresandamule

    @David. I wish BHP Billiton success on their recent acquired two blocks ( Carlisle Bay and Bimshire). The fact that we have a deep pocket investor is plus. I am a reasonable and pragmatic individual. Notwithstanding legitimate environmental concerns, I am not against exploitation our offshore natural resources.

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  • fortyacresandamule

    @Dullard. Exactly. As long as you have storage capacity on hand and storage fee is reasonable then you are in the money. Trading Companies like Vitol, Trafigura, Noble, Centrica and Glencore benefit immensely from supercontango.

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  • @ David April 28, 2020 5:26 AM
    “On a related matter, where does it put our interest in exploring oil offshore?”
    ++++++++++++++++++++++++++++++++++++++++++++++++++

    And who would be buying it in a post Covid world?

    Guyana, who has to put all dreams of instant black gold prosperity back into the pipeline?

    You cannot plan for a risky future of tourism on a tiny island while talking about offshore drilling for heavy crude oil tarnished with high sulphur content unsuitable for the profitable refining of high value finished petroleum products downstream.

    What Bajans should be asking is what has been the outcome of the US$ 6 million golden ‘Hello’ allegedly received over 5 years ago?

    Would MAM be putting Stinkliar in charge of oil exploration as a key plank in a post-Covid Recovery economic plan?

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  • Extracted from TT chat group of which the blogmaster is a member.

    War games to come with Orange about?

    HELL ON EARTH is a nation sanctioned, broke, assets frozen, addicted to Welfare and freeco locho, and in the midst of COVID-19 crisis. That is coming your way, T&T, if you continue to play with fire. Rowley could get his foreign medical checkup – paid by the poor & starving – in another country, e.g. Cuba, & all the food/drinks/his salary etc that are easily available to Govt politicians and 1%, but what about the the rest of the population if sanctions are imposed?

    Too many people still do not understand or are unwilling to understand and accept that YOU CANNOT HIDE external transactions/deals in most commodities in this era in an attempt to circumvent laws, rules, policies, sanctions etc. Maritime and Air traffic sites abound so everyone anywhere can monitor and know in realtime what is happening in air and water. Add satellites to that and nothing is secret. Add cutting-edge high tech monitoring and surveillance and you should be convinced that there are no secrets in this era. It is impossible to believe the T&T Govt and its companies really believe simplistic redirecting of fuel cargoes will actually fool anyone. Hence, the logical deduction is they are playing games and will be caught.

    Then there is another serious problem about Iranian airline flights in the Caribbean & Latam airspace. Let us hope we are not caught in that web or else sanctions will be imposed in a few days.

    BTW, some people also believe the Venezuelan VP and her entourage can hide the contents of planes that are flying in and out of T&T, are you people daft or delusional? It is extremely difficult to hide the contents of any plane loaded in any part of the world, especially if VIP or Special Persons or Persons of Interest et al are involved.
    As for conversations etc, assume nothing is beyond the reach of high tech equipment on earth, water, and in the skies. The POINT IS: planes landing in T&T and conversations by Venezuelans and all others, here and almost anywhere, will betray the intentions and transactions etc of those involved.
    Thus, those who want to know will know and will already know what has happened and happening here, there, and elsewhere, so simplistic and laughable attempts to hide deals, transactions, cargoes of fuel etc are doomed to fail and will lead to harmful and damaging effects on T&T and others.


    In response to questions on Wednesday, the US Embassy said that the “US government was aware of reports indicating that a shipment of gasoline from Trinidad and Tobago may have gone to Venezuela”.
    It noted that if T&T is found to have assisted Venezuela in getting fuel, it could open the country up to US sanctions.
    “In general, entities and individuals risk exposure to US sanctions by operating in the Venezuelan oil sector,” the US Embassy’s Public Affairs Section said.
    “This remains true regardless of how the transactions with Venezuela are conducted, whether using currency or in-kind exchanges and without respect to whether such conduct is otherwise legal under another country’s laws.”
    The US had imposed sanctions on the Russian owned Rosneft Trading S.A and its subsidiary, the Swiss-based TNK Trading International, back in March for supporting Maduro. The US has also imposed sanctions on Cuban company Cubametales and its parent company Corporacion Panamericana and the Italian-owned PB Tankers for operating in the Venezuelan energy sector.
    On April 21, a shipment of excess fuel left Pointe-a Pierre and was sold and shipped to Aruba.
    The Aruban refinery has been mothballed since 2012 and was only recently transferred from PDVSA to the Aruban government after US sanctions dried up credit lines for the Venezuelan company. There have been unsubstantiated reports coming out of Venezuelan media that the fuel was bound for Venezuela.
    Addressing this, the US Embassy said, “Some of the companies engaged in the Venezuelan oil trade business attempt to disguise the true nature of their business. These activities help them evade US and other countries’ efforts to prevent corrupt activities and to preserve assets for the benefit of the Venezuelan people.”
    The Embassy confirmed that it will “actively investigate all efforts by (Venezuelan President Nicolas) Maduro and his supporters to circumvent US sanctions.
    The Embassy added that the US government will also take “appropriate action” against those determined to be engaged in sanctionable activity as well as those found violating US sanctions.
    Guardian Media reached out to US representatives after Paria Fuel Trading Company chairman Newman George confirmed a shipment of excess fuel left Trinidad on April 21 and was shipped to Aruba.

    US probes T&T fuel shipment linked to Venezuela

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  • Barbados sold the blocs Miller as fortyacres weighed in earlier.

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