Can't they just stop pumping out oil?

[disneysteve]

I've been trying to learn more about the whole oil situation. The fact that the price actually dropped negative yesterday is apparently due to the fact that they are running out of storage space so they are at a point where they may have to pay people to take the oil away.

If that's the case, why not just stop the pumps for a while? If I ran a factory and made sprockets but the market to sell my sprockets dried up temporarily, I wouldn't keep the presses running 24/7 making thousands and thousands of sprockets I had nothing to do with. I'd turn off the machinery until the demand picked up again. Can't they do the same thing with oil? Stop or at least greatly slow down the production. The oil isn't going to go away. It will still be down in the ground waiting when it's needed again.

Plus, if you keep producing it when there's already a glut in the supply chain, that just drives the price down even more.

[bjl584]

Because of the way oil moves through the supply chains.
Producers produce. Period.
The only way to get cash flow is to keep pumping. Even though it doesn't make sense from a macro view

[disneysteve]

Because of the way oil moves through the supply chains.
Producers produce. Period.
The only way to get cash flow is to keep pumping. Even though it doesn't make sense from a macro view

How are you generating cash flow by producing a product that you literally can’t give away and may even have to pay to have removed?

[ua_guy]

Subscribed for the conversation...I don't actually know that much about big oil production and would like to follow along.

I have a friend who produces oil...he's not Exxon but their well provides good money for people in his family. The produce, and going into this as the price of a barrel started exceeding the price of production, they kept producing so they could store it and sell it down the road. Once there was no other place to store it, they had to stop producing. A period of inactivity has gone by and there is a regulation that they have to cap their wells after a period of inactivity. If the same is true with large oil producers, I could see them also running out of storage. National reserves, cargo ships idling at sea, all full....

[cypher1]

Subscribed for the conversation...I don't actually know that much about big oil production and would like to follow along.

I have a friend who produces oil...he's not Exxon but their well provides good money for people in his family. The produce, and going into this as the price of a barrel started exceeding the price of production, they kept producing so they could store it and sell it down the road. Once there was no other place to store it, they had to stop producing. A period of inactivity has gone by and there is a regulation that they have to cap their wells after a period of inactivity. If the same is true with large oil producers, I could see them also running out of storage. National reserves, cargo ships idling at sea, all full....

My roommate was just telling me today about someone they know who's family has land with about 12 pumps for oil generating a nice fixed monthly income. While this is on a tiny scale compared, I was told there is no simple kill switch to stop the pumps. They can slow down the production but even that has its limitations. But if they try to cap the wells, there are more moving parts, and would easily cost $10,000+ to do for each pump. Although that number may changed, since he was told this years ago. I can't imagine how that would work on an crazier large scale production environment.

[bjl584]

How are you generating cash flow by producing a product that you literally can’t give away and may even have to pay to have removed?

They are storing it in hopes of selling it at a higher price later in some cases.
And, there is a high cost to simply stop a well. Sometimes it's better to keep pumping and sell at a depressed price or find a buyer who will store it.
Shutting down production isn't like flipping a switch. There are lots of moving parts, investors, government regulation, etc. in the way.

[disneysteve]

Okay, it makes sense that they can't just stop production without expensive consequences. I had no idea how that worked. Slowing down production is probably feasible and maybe some have already done that. There must be a Slow-Medium-High switch, right? But then they could be shooting themselves in the foot long term when demand picks back up and they don't have a big store of oil to sell. But there's a significant storage cost as well. A couple of the articles I read talked about that, and how finding additional storage is getting difficult.

[TexasHusker]

One of the US's biggest achievements in the last 3 years is that we have rid ourselves of dependence on other countries for oil. Last year, the US was a net EXPORTER of oil. Shutting down the country is going to shut down (for good) a lot of US oil companies, and we will be back to where we started. It will be a very long road back for the US oil industry. There are around 175,000 people employed by the US oil and gas industry, most of this quite high-paying jobs. And then you have the communities they live in - hotels, restaurants, housing, banking, schools. So there's no telling what the multiple is on this. Enjoy the cheap gas, because we are going to pay a very high price for it.

[kork13]

They're also running out out storage capacity... I think I saw an article the other day that stocks are already at around 85% of storage capacity.

[disneysteve]

Last year, the US was a net EXPORTER of oil. Shutting down the country is going to shut down (for good) a lot of US oil companies, and we will be back to where we started.

It isn't just our country that shut down. It's the whole world that shut down. China, Japan, England, France, Canada, Mexico, everywhere. I spoke to a friend in England on Friday. She hasn't been out of her apartment for 5 weeks. It isn't just the US that isn't driving and using gas and oil. It's much of the developed world. This is a global issue. Surely oil producers in other countries are just as impacted as they are here.

[TexasHusker]

It isn't just our country that shut down. It's the whole world that shut down. China, Japan, England, France, Canada, Mexico, everywhere. I spoke to a friend in England on Friday. She hasn't been out of her apartment for 5 weeks. It isn't just the US that isn't driving and using gas and oil. It's much of the developed world. This is a global issue. Surely oil producers in other countries are just as impacted as they are here.

Never claimed it was the only country to shut down. Quarantines have a single purpose: slow the spread to prevent rationalization of healthcare resources. NYC aside, resources are not threatened, thus eliminating the need for quarantine. Until we moved the goal posts.

[Singuy]

Steve I think you are missing out on a piece of the story which is that these are CONTRACT for 1000 barrels of oil per contract. It's the gamblers who bought these contracts of oil hoping that they can sell them for a higher price and pocket the difference. They may have purchased these contracts years or months ago prior to Covid 19. And those contracts expire today which means if you are the contract holder, you are now the owner of 1000 barrels of oil per contact that you have. They will ship it to you and you'll need to find a way to store them and sell them locally. So these contracts suddenly became ill liquid because no want wants them due to storage problems in May. So it's not a matter of "stopping production", but it's a matter of gamblers playing around with commodities and are now at the end of the line, paying whatever the price to dump them to someone else. It's like a short squeeze of a stock in which you are willing to pay any loss to cover and when there are no liquidity, that payment skyrockets.

[disneysteve]

Steve I think you are missing out on a piece of the story which is that these are CONTRACT for 1000 barrels of oil per contract. It's the gamblers who bought these contracts of oil hoping that they can sell them for a higher price and pocket the difference. They may have purchased these contracts years or months ago prior to Covid 19. And those contracts expire today which means if you are the contract holder, you are now the owner of 1000 barrels of oil per contact that you have. They will ship it to you and you'll need to find a way to store them and sell them locally.

So it isn't actually the oil producers themselves who are stuck with the product but rather the buyers of that oil? And they committed to those purchases under vastly different circumstances? If that's the case, the whole story makes a whole lot more sense.

[Singuy]

So it isn't actually the oil producers themselves who are stuck with the product but rather the buyers of that oil? And they committed to those purchases under vastly different circumstances? If that's the case, the whole story makes a whole lot more sense.

No oil producers are not paying people to take their oil. They were already paid by the contract holders, and it's these contract holders who are screwed because they were hoping the oil they bought would go up by a certain date but it didn't. It's usually okay that it didn't go up because plenty of people are willing to take the contracts off their hands except not today..lol.

So when they say trading commodity "futures"...they mean buying today to lock in a price and hopefully get a return on this in the future.

[~bs]

Because of the way oil moves through the supply chains.
Producers produce. Period.
The only way to get cash flow is to keep pumping. Even though it doesn't make sense from a macro view

Yup, It's almost like if someone has a bad cut, the answer isn't to just stop the heart from pumping.