Fantome wrote: WheresMeGold wrote: Quotes from the article:
While Saudi Arabia and other Gulf producers have pledged to cut supply starting next month, they continue to flood the market, swelling global stockpiles and testing capacity limits. The world is still choking on too much oil and will run out of places to store it within a month, according to trader Gunvor Group Ltd.
The difference between crude production and product demand is about 25 million barrels a day, Gunvor’s co-founder and chief executive officer Torbjorn Tornqvist said. Storage both on land and at sea is filling up as traders rush to find a place for the unwanted crude. “It may be hard to even find a place to store oil three to four weeks from now,” he said.
https://www.google.com/amp/s/www.bloomberg.com/amp/news/articles/2020-04-14/oil-holds-above-20-as-demand-gloom-overshadows-production-deal
In terms of basic economic theory...companies can continue to produce in the short run if the price they get for what produce is above their variable costs of production...emphasis on "short run"
1....If you look at the financial statements of Canadian producers and what they get with the discounts to sell to te US most are already below their marginal costs of production
2...we are rapidly approaching the same situation for shale producers in the US
3...as we get closer and closer to the storage limit..prices will necessarily drop and once the limit has been reached the price will have no option but to fall to close to zero...ie..anyone continuing to produce will have to give the oil away...
The questions then become
"When will the oil producers blink and cut production?"
Will enough of them cut before the storage is full?
If the glut persists for any length of time then the overall economy will face a situation similar to the subprime crisis of 2008. In the US...total energy industry debt is about the same as the total subprime debt that precipitated the 2008 Great Recession...ie...2 trillion dollars
The "saving grace" is that the banks are not as levered now as they were in 2007/08 so the multiplier effects will be lower... BUT...we also have other debt issues economy wide due the Government imposed shut down of economic activity around the world...
How will this play out?
Who knows....but the chances of it being really bad are not insignificant...