WEST PALM BEACH, FLORIDA – An unstoppable force is about to collide with an immovable object.
Oil producers are the unstoppable force. Spurred by hope for bailouts and a quick rebound in oil demand, oil producers keep pumping.
Storage capacity is the immovable object. There is no more storage.
A collision is approaching… (more below)
Last Days in Quarantine
Greetings from West Palm Beach…
We leave on our great American road trip in 11 days. Don’t know where we’re going. I guess it’ll depend on which states have lifted their restrictions by then.
We definitely want to go to Mount Rushmore, the Badlands, and Yellowstone National Park. Otherwise, we’ll go wherever the wind blows us…
I wonder if America’s parks and campgrounds will be busy.
In the meantime, we’ve made the most of our time in quarantine.
The kids have had a wonderful time being with their grandparents. And Kate and I have gotten so much work done on our computers.
I’ve spent hours studying economics and natural resource markets, for example. And today, I’m finishing the book about our trip. It’s going to be in epistolary form, which means it’ll be a collection of journal entries and letters.
I started the book with the blog posts I wrote before our trip started, when I was very depressed and plagued by suicidal thoughts. They’re pretty bleak (and embarrassing).
I hesitated to include them, but they’re relevant to the story and they’re real, so they have to go in.
An Oil Crisis Like No Other
Back to oil…
Over a period of about 45 days, something like one-third to one-quarter of global energy demand disappeared.
It’s not possible to put into words what a catastrophe this is for the global oil industry.
It’s unprecedented. No other oil crisis compares. (There was a big oil supply glut in the early ’80s, but this one will be five to 10 times bigger.)
The sudden demand destruction means there’s something like 25 million barrels of surplus oil entering the market EVERY DAY. That’s about 12 supertankers of oil that has nowhere to go except into storage. Every day.
There isn’t enough spare storage. The global economy doesn’t value spare capacity in the supply chain. Not in oil. Not in manufacturing. Not in any product. Maintaining empty tank farms in case there’s a once-in-a-generation oil glut never occurred to anyone.
(Ironically, there was a glut of oil tankers for most of the last decade, but that ended two years ago when ship owners finally stopped ordering new ships.)
Once the storage is full – which should be in the next couple of weeks – the oil price is going to zero… or even below zero. It’s going to stay there until demand is greater than supply.
I know this sounds crazy. Or even overly simplistic. But this is how free markets work. And I just can’t see any other outcome.
When will demand be greater than supply? This summer? In the fall? When the oil industry finally decides to turn off the taps?
Meanwhile, storage tanks will be so full, they will be bursting at the rivets.
The Start of a New Bull Market
The last time we had a big surplus of oil was in 2016, after Saudi Arabia oversupplied the market and started a price war. It took two and a half years to burn off that surplus… and that was with demand at record highs.
This time, the inventory build is bigger. And demand has been impaired, perhaps long-term. So it’s safe to assume it could take us at least three years to work through the excess oil held in storage this time.
All this is to say, oil prices are going to be low for much longer than anyone expects and – except for the very lowest cost producers – there won’t be any activity in the oil patch.
I just can’t see how the oil patches of Alberta, North Dakota, Pennsylvania, and Texas don’t go into hibernation.
Meanwhile, oil tankers have been in a bear market for the last decade or so because there were too many boats in the fleet. The problem finally went away in 2018 and 2019 as shipping lines sent hundreds of oil tankers to be scrapped and didn’t replace them.
Even before COVID-19, there weren’t enough oil tankers. And post COVID-19, with potentially up to a third of the fleet being tied up as floating storage for oil, there definitely aren’t enough tankers.
Tanker rates, which I wrote about here, are exploding higher. In some cases, rates to lease oil tankers at the moment are DOUBLE the previous all-time highs set last decade.
These rates are generating headlines in the press. And they’re definitely not sustainable.
But I think all the sensational news reports I see about oil tankers and hype around tanker lease rates are missing the bigger picture.
And that is, there’s about to be a long, sustained bull market in oil tanker stocks that will last until the industry orders more ships. And that’s going to take years…
– Tom Dyson
P.S. There seems to be a huge number of retail investors trying to buy cheap oil by buying the oil ETFs like USO and UCO. This is even happening in China. (I saw a story yesterday about a 26-year-old Chinese investor who put his entire life savings into a Chinese oil product that tracked WTI crude oil prices. The product was called “Crude Oil Fortunes.” He lost his life savings overnight when WTI went negative last week.)
If I’m right about the oil market, these ETF products are going to be terrible investments for a long time. I wouldn’t touch them. If you must speculate in oil, buy oil tankers instead.
P.P.S. Another thing I love about oil tankers is that they dance to their own beat. What I mean is, they aren’t correlated to movements in the broad stock market, the economy, or the latest Federal Reserve policies. They’re an uncorrelated asset that does well in times of volatility. They’re the perfect complement to a gold portfolio and the perfect asset for a “fringe” investor like me.
Like what you’re reading? Send your thoughts to [email protected].
In today’s mailbag, hopes for the Dyson family as they prepare to hit the road… and talk of oil production after Friday’s postcard, “The Feds Are Following This 500-Year Trend”…
Reader comment: I read your Postcards daily and have learned immensely from your ideas, while vicariously enjoying your family. I grew up in a family of seven children. At the drop of a hat, my dad would hitch the Starcraft pop-up camper to the back of the three-row Pontiac station wagon and off we would go. A note of advice: Driving country roads at 80 mph will cause blowouts on your camper tires. A good chance for the kids to learn a little mechanics.
Tom’s response: Thank you to everyone who wrote in with driving, camping, and RV advice this week. I won’t publish those letters, but I read everything you send me and your advice is very helpful.
Reader comment: I would take what these supposed experts are telling you with a grain of salt. Oil wells are shut in all the time, everywhere. Yes, there can be costs associated with bringing them back on. But shutting them in is not an all-or-nothing game.
Literally, offshore they shut these platforms down every year during hurricane season. Second, if a well freezes, it is not the end of the world. They use hot oilers to bring them back on. I have worked in the industry in Canada for many years now and what people are saying about this is largely untrue. This is just more manipulation to keep pumping. Nobody wants their production to go to zero so they say they can’t do it for “x” reason, but it’s just gamesmanship. Just my two cents.
Reader comment: You stated in your last letter that, “Actually, most of the time, when you close an oil well, it stays closed forever. If you want to extract oil from the same spot in the future, you have to start from scratch.”
I have been in oilfields all over the world for almost 50 years. For many years, all wells in the U.S. had an allotment. That was the most you could produce out of a well within a month. When you reached your max, you shut the well in. This was done to protect the reservoir gas drive or, if it was water driven, to keep water from coming into the wellbore. Offshore wells usually have storm packers installed.
When storms come through or presidents like Obama shut down all production offshore, you will shut-in the well with the wellhead and then the storm packer. This way, you trap wellhead pressure above the storm packer and below the wellhead to allow the well to be brought online easier.
There are some wells that will load up if they are shut-in but can be brought back online by gas lift, swabbing, or nitrogen jetting and plunger lifts. Wells are shut-in all the time. Very few wells will you lose, just because you shut them in. I enjoy reading your letters. Keep up the family life and continue making it interesting for all concerned, including us with your updates.
Reader comment: What a pleasure to write to you. I hope I can be of service and somewhere down the road have a conversation in person. I began my involvement in the Agora Group when I joined the Oxford Club many many years ago for $49. Visited the Club in Baltimore. Along the way, I became a Chairman member and joined a few of the other newsletters from the many teases sent to me yearly. The value of the information gleaned has been well worth the time/cost of weeding through the information presented to find that right fit. Love the adventures of Bonner’s Diary as well. Long story short, the Agora team has been an inspiration to me.
Reader comment: Hi Tom, I’ve enjoyed reading about your family travels! I’m confused by your comment that offshore oil can not shut-in production temporarily. I thought that is what they do when, for example, a major hurricane enters the Gulf of Mexico. Isn’t this temporary shut-in for a week or so, followed by a restarting of production?
Reader comment: Glad to hear that you are preparing to hit the road again and looking forward to wonderful postcards and pictures from the national parks. Thank you for your observations about the petroleum industry. It is being hit by the perfect storm at this time and it is painful to watch. I spent my career with a major, integrated oil company. Please drive safely.
Tom’s note: Thank you for your messages! Kate and I read every one, even if we don’t respond right away. Please keep writing us at [email protected].