Oil demand is in a freefall, thanks to improvements in battery technology, the proliferation of green energy alternatives, and — let’s face it — a world on lockdown due to the deadly COVID-19 pandemic. All of these factors have come together to push barrels of oil to their lowest price in decades, but production hasn’t stopped, which means there are now millions and millions of barrels of crude just sort of stuck. Adrift at sea, “stored” on massive oil tankers and waiting for things to go back to normal.
Except that, for energy companies, it’s getting harder and harder to imagine that we’ll ever get back to what they think of as “normal” with each passing day of telecommuting and each new press release from companies like Tesla, Lucid, and Volvo Polestar launching new EVs and gloating about success after success. It sort of begs the question: is oil over?
“There’s oil all over the oceans right now. That’s where they are storing oil. We have never seen anything like that,” US President and alleged sex-offender Donald Trump said this week, seemingly flustered, from the podium of the White House. “Every ship is now loaded to the gills (with oil).”
Despite the fact that oil companies are losing money, gas stations are facing bankruptcy, and lost tax revenue from fuel sales is choking cash-strapped government budgets, not everyone is losing money. In fact, it’s probably a great time to be in the fuel storage business, because that business is booming! “The world is overproducing oil at a historic rate,” explains Robert Hvide MacLeod, the head of Frontline Management, one of the world’s largest operators of oil tankers. “Land-based storage is limited and selling out fast. Storage on ships will be the only solution.”
The graph clearly shows oil storage profits about as high as — if not higher than — their peak in the 2008/09 financial crisis. What’s more, it remains to be seen whether or not the market will “bounce back” the way it did back then, when mainstream electric vehicles like the Tesla Model 3 weren’t yet a thing, really.
I’m not the only one saying things like this, either. Even in the industry, there are concerns being voiced. Ben Luckock, for example, is the co-head of oil trading at merchant Trafigura Group, and he’s saying that oil producing nations are generating “a commodity that the world doesn’t need,” forcing crude oil, literally, into the oceans. “The problem for crude oil is fast coming. We need more contango (a scenario where the futures price of a commodity is higher than the price of that commodity today) to pay for non-traditional types of storage,” he said, and that doesn’t seem likely for oil.
Those oil producing nations, mainly Russia and OPEC, continue to talk about cuts to artificially stem the global fuel supply and, it’s hoped, push prices back up. But there are problems there, too. Even if OPEC cuts production by 10 million barrels a day, as Trump has suggested publicly, it won’t be enough to offset the drop in demand. “According to our numbers, even this 10 million barrels cut, in the second quarter we may well see a stock building over 15 million barrels per day,” said Fatih Birol, the head of the International Energy Agency.
These are interesting times, indeed. What do you guys think? Are all these floating tankers just a dozen or so Exxon Valdez’ waiting to happen, or are we just in a temporary, pandemic-fueled lull before everyone fires up their F150s and gets back to work? Let us know what you think in the comment section.
Sources | Images: Bloomberg.
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