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How The Oil Market Got So Messed Up

In this Wednesday, April 8, 2020, file photo, the sun sets behind an idle pump jack near Karnes City, Texas.
In this Wednesday, April 8, 2020, file photo, the sun sets behind an idle pump jack near Karnes City, Texas.
Image: AP Photo/Eric Gay
The Morning ShiftAll your daily car news in one convenient place. Isn't your time more important?

We need to explain how the oil market crashed so hard yesterday, car output is expected to plummet this year and Daimler and Volvo are busy partnering up over fuel-cell tech. All that and more in The Morning Shift for Tuesday, April 21, 2020.

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1st Gear: Store It In The Ground?

Here’s how the oil market crashed so hard yesterday it led to negative prices, which doesn’t seem possible but actually is, somehow.

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From Bloomberg:

The supply of oil is also inelastic in the short term. It’s expensive to shut down a producing well, so some producers are willing to keep pumping crude temporarily even at a loss.

Saudi Arabia, Russia, and others are producing more oil than the market can consume, in a game of chicken—each hoping the others will back down. President Trump’s effort to broker a deal to cut production failed to stop the rout. In the long run, both supply and demand are more elastic, but as John Maynard Keynes said, in the long run we’re all dead.

Storage is ordinarily the buffer that stabilizes inelastic markets. If supply exceeds demand, the excess goes into tanks. But the overproduction has gone on for so long that there’s almost no place left to store crude. “It’s kind of desperation time,” says energy economist Philip Verleger of PKVerleger LLC.

So, competition and cost has led to overproduction, which means there’s too much oil supply, which now means that the supply capacities the market is used to, which are usually sustaining much lower output levels, are filling up and there’s nowhere for all this new oil to go. Let’s continue with Bloomberg:

Hence the crash. On Monday, the contract for May delivery of West Texas Intermediate crude fell more than $55 to settle at a negative $37.63 a barrel on Nymex. That was the first time in history the contract traded for less than zero. It was well below even the lows of March 1986 and December 1998. The last year that oil averaged less than $10 a barrel was … 1974.

“We’re living out the worst possible nightmare” for oil producers, says Steven Schorck, principal of the Schorck Group, an energy-market analysis company based in Villanova, Pa.

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So what’s this about negative prices? Well, when you get to a point where you can’t store the oil to sell later, or if you’re a producer who needs to keep making more to keep your business running, the value of oil becomes zero. But you still have all this oil that needs to go somewhere, which is going to cost you money because nobody wants to take it, which lowers the value of the oil now below zero, because you actually have to pay to keep it somewhere or get rid of it.

Prices can go outright negative in inelastic markets: The sellers pay the buyers to take it. The natural gas that comes out of the ground as a byproduct of oil production sometimes costs less than zero because it’s viewed as waste. Power generators sometimes pay customers to use electricity because it’s cheaper than shutting down power plants and having to restart them later. Dairy farmers haven’t reached the point of paying people to buy their milk, but they’re dumping what they have because the cows are producing more than the market will bear. (You can’t shut off a cow.)

It once seemed improbable that the price of oil would go to zero or turn negative, because it’s more easily storable than milk, electricity, or the gas associated with oil production. But as long ago as mid-March, Wyoming Asphalt Sour, a dense oil used mostly to produce paving bitumen, was bid at –19¢ a barrel, Bloomberg News reported.

The reason for the sharply negative price is that speculators are desperate to get out of their contracts before expiration—because if they still own the contract when trading stops, they’ll be required to take delivery. And most of them have no way to do that. There are no oil tanks on Wall Street.

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2nd Gear: Tesla Website’s Reality Problem

Tesla infamously lists a lower value for its cars online than their actual purchase price. This is done by factoring in “potential cost savings” the vehicle owner will supposedly benefit from after the sale, like fuel savings over a traditional combustion-engine car.

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The problem there, though, is that fuel costs are not consistent, and lately, they’re at record lows. So I’ll let Bloomberg explain:

The electric-car maker has, for example, estimated $4,300 in gas savings for buyers of the Model 3 sedan since at least late 2018. That number has remained static even as pump prices have fluctuated and, more recently, fallen precipitously. The national average for regular unleaded dropped Monday to $1.81 a gallon, the lowest since March 2016, according to AAA.

Two U.S. cities are even averaging under $1 a gallon, a first in the 20-year history of GasBuddy, which bills itself as the most popular travel and navigation app in North America.

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With gas as low as $1 in some places, there’s zero chance of your electric car ever making up to that claimed $4,300 in estimated fuel savings. That’s just the nature of the oil market right now, as it crashes and burns. With so much oil supply reserved and more continuously flowing as we speak, gas will likely be cheap for some months to come.

Technically you didn’t actually lose money, if you’re a Tesla owner. You just paid more for a later discount you aren’t going to get. Sorry.

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3rd Gear: 19 Million Cars Lost To Covid-19

With the global auto industry being pretty much shut down over the last month, and likely to remain effectively disabled for some months to come, global annual new car output just isn’t going to be what it was projected to be.

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From Automotive News:

Global light vehicle production is now expected to fall more than 20 percent to around 71 million units in 2020 as a result of the COVID-19 pandemic and ensuing recession, a top automotive forecaster said Monday.

That steep decline, far greater than anticipated earlier this year, likely will cost global automakers 19 million units in lost production in 2020, according to LMC Automotive, which warned those projections could slip further, depending on how quickly major regions recover.

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For environmentalists trying to minimize the amount of new cars on the road, this could be seen as a win. But if the economy recovers in the next year, I bet customers and automakers alike will find ways to make up for lost ground sooner than later.

4th Gear: Fuel Cell Or Hard Sell?

The stakes of unpredictable disasters like the coronavirus have lead Daimler and Volvo into quickening a deal that began discussions months ago, despite harsh economic conditions that has otherwise frozen industry planning.

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The reason? The bad times have revealed to both companies they can put themselves each at lower risk if they work together on their major R&D projects. And lo, a fuel cell truck joint venture is born. From Reuters:

“The common goal is for both companies to offer heavy-duty vehicles with fuel cells for demanding long-haul applications in series production in the second half of the decade,” Daimler (DAIGn.DE) and Volvo (VOLVb.ST) said on Tuesday.

The joint venture agreed by the two companies will operate as an independent and autonomous entity, with Daimler Truck AG and the Volvo Group continuing to be competitors in all other areas of business, they said in a joint statement.

“Joining forces will decrease development costs for both companies and accelerate the market introduction of fuel cell systems in products used for heavy-duty transport and demanding long-haul applications,” the companies said.

Volvo will acquire 50% in the joint venture for around 0.6 billion euros, they added. Both companies will invest a nine-digit amount each into developing the fuel cell system.

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I could see how fuel cell application for long-haul trucks could be more feasible and cost-effective than on passenger cars, where the technology has struggled to gain ground against the advancement of electric vehicles, given the potential for greater fuel storage on a larger vehicle.

Happy for the couple who found love (and economic security) in harsh times.

5th Gear: Online Now Hot Cars In Pennsylvania Looking To Meet

Pennsylvania’s hottest new cars are available to chat with online! Just click the link below for more details >>>>> From Auto News:

Pennsylvania dealerships will be allowed to sell vehicles online, Gov. Tom Wolf said Monday, a move that loosens a sales ban that had been in place for a month to slow COVID-19 transmission.

Wolf on Monday signed state Senate Bill 841, allowing remote online notarizations. A notary public is necessary to close a vehicle purchase in Pennsylvania. In-person sales or lease transactions are still prohibited, though parts and service operations can continue.

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Supposedly Pennsylvania is among the top 10 states for new car sales, so this is a big win for online sales. It makes sense!

Reverse: When GM Was On Top

On April 21, 1967, General Motors (GM) celebrates the manufacture of its 100 millionth American-made car. At the time, GM was the world’s largest automaker.

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I think Cash For Clunkers did away with a lot of these cars, sadly. Via History.

Neutral: Are You Hesitant To Buy A Car Online?

As much as I love playing around with different configurations of cars online, I’ve never actually bought a car virtually. I’m not sure I’m ready to, either. Perhaps, in my profession, it is possible as I have more chance to drive a car before buying one without having to actually go to a dealership, so it should be fairly comfortable for me to buy online. But I’ve only ever considered it in those dark tense few minutes one night a couple of years ago when I almost pulled the trigger on a Model 3, and even then I hadn’t driven it and ultimately backed out. How about you? What’s holding you back?

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DISCUSSION

You can’t shut off a cow

If you’ll pardon the expression, that is bull shit.