The World Has Too Much Oil
I'm Jack how hosted the new baron streetwise podcast on business and investing this week. I focus on Disney and how the pandemic might change theme parks movies and television. Here's Disney executive chairman. Bob Eiger just as we now do bag checks for everybody that goes into our parks. It could be an at some point. We had a component of people's temperatures beyond the pandemic. On this week's Barron streetwise. Subscribe on Apple podcasts. Spotify or wherever you listen to podcasts. Russell Gold has covered oil for almost two decades. Oil is what makes modern society function. It's the gasoline in our tanks. It's the plastic in our lives. Now all of a sudden we've just stopped using it. No one's sure exactly much less oil were using. Since the corona virus became a global pandemic. But with so many planes grounded and cars off the road. It's a lot less. I sit and I look at the numbers I talk to people. I try to understand and I just can't wrap my mind around the fact that we've essentially stopped using an enormous amount of oil and when oil demand craters and there's still a lot of supply on the market. You know what happens? Look AT OIL. Prices completely decimated tumbling touching levels. Not Seen since two thousand and three. The average price for gasoline is two dollars and twenty three cents per gallon all the way down in fact his falling in about two cents a gallon every day. The only way to get oil prices backup is for producers to cut the supply of oil. But here's the weird thing for the last couple of weeks. No one has been willing to do that. Everyone in the global oil industry understood that they needed to come a lot from the market but nobody wanted to be the first one to do that. Because the first people who do that they're gonNA lose market share and they're going to lose revenue so collectively we just had all these oil producers continuing to produce continuing to produce hoping that somebody else is the one to make that sacrifice to shut their wells down. And that's why sort of see this as a global game of chicken. Everyone was driving at very high speeds toward each other. And hoping that the other person veers off at the last second today on the show how. The oil industry found itself caught in a global game of chicken. And how it's trying to save itself from a historic glut of oil. Welcome to the Journal. Our show about money business and power. I'm Kate Linebaugh. It's Friday April tenth. There are a lot of reasons why no one wanted to be the first to stop pumping oil if you're an oil producer and you shut off your well. It might be good for oil prices. But it's not good for you. You quit the market and your competitors are going to fill that gap and take your customers but it gets worse when you do start pumping oil again. You're going to be hit with a huge bill because when you shut your well down. It's not just a matter of flipping a switch and then flipping back on and a few months when you turn the whaleback on you might have lost pressures. You'RE GONNA have to spend a few million dollars to put the pressure back in the well so it starts to flow. It's a very difficult situation to stop and restart your industry and no one wants to be the country or the company to undertake that so after the corona virus took hold around the world. Everyone just kept pumping and the price of oil just kept dropping This was bad news for big state oil producers who depend on oil money to drive their economies and support their political regimes but it also hurt American producers to like those in West Texas in an area called the Permian Basin in the Permian Basin. I did a back of the envelope. Calculation if the benchmark price of oil in the United States is about twenty five dollars that probably means physical barrel in West Texas Fetches Twenty Twenty Dollars. The premium basin producers are losing. Maybe two hundred million dollars a day and can they sustain that. No you're going to have a large swath of the Shale. Oil operators that are going to have to seek bankruptcy. They're ready under financial pressure because they were spending more money than they were bringing in. I suspect we would see a lot of consolidation and a lot of bankruptcies. What would that mean for the American economy? Well it certainly wouldn't be helpful to the American economy. There are thousands tens of thousands of jobs here in Texas and North Dakota and Oklahoma that would be affected. I mean maybe one of the ways to think about this. Is that coming out of the great recession of two thousand eight two thousand nine one of the things that lead the country back out was that Texas was a fairly strong economy. Didn't get impacted that much. This time around Texas will not a sort of an engine point the rest of the country Texas will be the caboose are that the rest of the country is GonNa have to pull all this turbulence in the oil market. It's not just happening. Because of Corona virus the international game of chicken started in early March before corona virus was declared a global pandemic. That's when oil markets suddenly stopped working the way they had for decades since the nineteen sixties a group of oil producing states have worked together to regulate the price of oil you know them as OPEC OPEC cartel of oil producing nations would get together and when the market was oversupplied they would cut back on supply. When the market appeared undersupplied they would increase supplied. Opec's goal is to keep oil prices in a goldilocks zone. A NICE MIDDLE TO HIGH PRICE. Where people can get the oil they want. They can get it at a price so that the oil producing nations have four coffers and the market is smooth sailing. Saudi Arabia played a key role. Here it produce so much oil. It's actions alone can affect oil price so it was the group's so called swing producer when oil prices needed to go down. Saudi would pump more oil. Prices needed to go up. Saudi would pump less and take the financial hit Saudi Arabia a few years ago. Got A little bit tired of being the only swing producer. So they said look. We don't WanNA swing alone. We want Russia one of the three big oil producers in the world. Us Russian Saudi Arabia. We want Russia's join with us so we had something called OPEC plus an opaque plus pretty much was Saudi Arabia n Russia acting together figuring out. How much oil they can put out in the markets. This works for a while but early last month that alliance between Saudi Arabia and Russia fell apart. Saudi wanted Russia to cut some of its oil production but Russia didn't want to it didn't swing with Saudi anymore and so- Saudi Arabia pulled a power move. It started pumping more oil or absolute. Saudi Arabia has said we're going to increase production of oil right now and then. They were matched by. I believe it was Kuwait in the UAE so effectively as mid March OPEC stop functioning as a cartel. They stop functioning as a market regulator. What we're seeing right now is a free market of oil for the first time in. I don't know six seven decades and that's what's both so scary and so exciting about this is that in a way we've been bowling with the bumpers on and the bumpers just went down for the oil industry. This timing could not have been worse. Foil demand and oil prices were about to drop off a cliff because of the Corona Virus. And now there was no cartel to force prices back up. It was every oil producer for itself. Coming up how. The oil industry is fighting to survive in a world flooded with oil technology. It's in your pocket your car. Your Business and the Wall Street. Journal's Tech news briefing is tracking all of it from consumer tech to cybersecurity from the giants to the startups every weekday. We bring you the latest stories about the companies and advancements that are changing the way we live and work tech is remaking the world. We'll make sure your part of it subscribe to the WSJ tech news briefing from the Wall Street Journal. Wherever you get your podcasts. Welcome back after the blow up between Russia and Saudi Arabia it no longer benefited oil producers to work together to regulate prices instead. Everyone was trying to grab market share for themselves. One way they did that was by undercutting each other on price to try to steal each other's customers but another way was by kicking off a secondary war a storage war in a world where we're producing millions of barrels a day of excess crude the countries in the companies. That control storage are in a position because they can continue pumping they can fill up that storage. They have a place to go. That's power no one is buying all that oil producers are still pumping but producers. Still have to put it somewhere so they're searching for more storage looking for a place any place to park their oil thirteen reports of trains that are used in the United States and Canada and move oil around the filling up like hundred car trains and just parking him. Sounds like my creative use of my refrigerator. Now as I stuff at full of two weeks of Kovic Shopping. Yes exactly exactly. I mean I was joking around with someone saying I can't wait till the first person you know flies over some backyard Houston and find somebody who's emptied out their backyard. Pool filled up with crude oil. I mean it's going to happen sooner or later so in this storage war. Is Anyone winning both Saudi Arabia right after they said that they were GONNA increase? Production went out and leased out by our count about twenty four of these giant crude tankers. That actually called the very large crude carriers. These are big ships that carry oil enormous ships. Yes so big that they have trouble fitting through the Panama Canal and Saudi contractor with these ships. Just to store its own oil. There's actually a term for this in the oil industry oil on the water. Russell says there's a lot of oil on the water right now but storing oil in gigantic ships and railcars. Those are temporary solutions eventually. The system will seize up. The world will run out of oil storage. The experts that we've interviewed said. We're probably talking three weeks four weeks. No one's quite sure but eventually we're going to have to see a wholesale shutdown of the industry you can't just keep producing oil. The no one wants so to avoid that shutdown this week. Opec and Russia came back to the bargaining table to see if they could strike a truce to raise the price of oil and save their industry. The OPEC meeting that happened must have been the most heavily anticipated. Opec meeting in twenty years or more. Everyone wanted to know whether Saudi Arabia was gonna Blink whether Russia was going to come to the table whether those going to be a grand coalition of lots of countries. Coming together to stabilize the oil markets. Russell says this meeting was crazy. Saudi and Russia wanted to get each other to cut production and they were also pressuring other countries to cut their production to things got so heated that at one point the Mexican delegation left. The meeting. Mexico eventually came back and in the end. There was a deal. The bottom line is that Russia and Saudi Arabia have agreed to a six million barrel a day cut which they're hoping will grow as some of the other countries in OPEC oil producing nations possibly even including the United States. Join within the next couple of days. We'll traders were not particularly happy with that and oil actually ended up down about ten percent on the day after starting the day. Very high with high expectations so even though Sadie Arabia and Russia are cutting production after this meeting. Oil prices dropped. Can you explain that? Sure traders wanted more if you're going to balance the market you need cuts significantly more than six or ten million barrels a day and there were warnings from OPEC that have collectively. The oil industry keeps producing too much oil and filling up storage. You're going to be looking at oil prices in the single digits below ten dollars a barrel. When was the last time? Oil prices were below ten dollars a barrel. Oh my goodness you probably have to go back to the nineteen. As last time you saw prices this low but to put these cuts in perspective these are also the biggest cuts that OPEC has agreed to. Well that's what's so amazing. This is the largest cut that anyone can remember. And yet it wasn't enough and that in a nutshell is just the extreme position that the oil market finds itself in right now Russia and Saudi Arabia. Coming back to the negotiating table and cutting a deal wasn't enough to raise oil prices. It also didn't change the fact that the world is going to run out of oil storage at most. This deal bought oil producers just a little more time but Russell says that when that time is up the landscape for oil producers could look really different. One of the fascinating questions that we're dealing with right now is that we're going through this extended period of time where people are learning that you know. Maybe I don't need to fly to every meeting. I have maybe I can do more online meetings. There's also a chance that a lot of people coming out of this because of growing concern about international travel won't want to travel as much as they had in the past so one of the fascinating questions is we went into this period where they global hundred million barrel a day oil market. What are we gonNA come out of? It is nobody believes we're going to come out at one hundred million but we're not sure. Is there going to be ninety? Five million and how much is the market going to shrink? We just don't know how big that is yet. That's all for today. Friday April tenth. The Journal is a CO production of Gimblett and the Wall Street Journal. Your hosts Aranka Knutson and me Kate. Limbaugh shows made by Peter Resident Gerard. Cole p God Cari for needed Jablonski. Anti Munaf Ricky Vet Ski. Sarah Platt will Aruban Anti Rose Strasser and robs if co our show is engineered by Griffin Tanner with help from Sam Bera. Our theme music is by so widely additional music. This week from Katherine Anderson. Peter Leonard M among So widely Bobby Lords keen collective and blue dot sessions special. Thanks to joy crain. Thanks for listening. See You on Monday.