The Unthinkable Is Happening: Oil Storage Space Is About To Run Out

In the past three weeks, oil plunged and has continued to plunge even more in the aftermath of the oil price war declared between Saudi Arabia and Russia, and where US shale (and its junk bonds) has been caught in the crossfire. However, as we reported last week, we may get to the absurd point when the price of a barrel of oil not only hits $0 but goes negative.

The reason: according to Mizuho’s Paul Sankey, at a whopping 15MM b/d in oversupply, crude prices could go negative as Saudi and Russian barrels enter the market. According to Sankey, much of the US 4MM bpd in crude exports will be curtailed as prices fall and tanker rates soar. And with US storage roughly 50% full, and able to take another 135MM bbl more, assuming a build rate of 2MM b/d, the US can add 14MM bbl/week for 10 weeks until full.

As a result, there is a now race between filling storage and negative pricing "unless U.S. decline rates can outpace inventory builds, which we very much doubt." Said otherwise, absent dramatic changes, in roughly 3 months, energy merchants will be paying you if you generously take a couple million barrels of crude off their hands.

It went from bad to an outright disaster earlier this week when Goldman, Vitol, and the IEA all raised their estimate for daily oil oversupply to an unthinkable 20 million barrels per day, as a result of the collapse in oil demand as the global economy grinds to a halt coupled with Saudi Arabia's determination to put all of its higher-cost OPEC peers out of business.

This means that for the oil market to rebalance, both Saudi Arabia and Russia would have to halt all output. Needless to say that is not happening, in fact Saudi Arabia is now pumping between 2 and 3 million barrels more than it did last month, which is why the negative oil price scenario envisioned by Sankey is looking more real by the day.

So real, in fact, that the US energy industry is starting to contemplate the all too real possibility of running out of storage and as Bloomberg reports American pipeline operators have begun asking oil producers to voluntarily ratchet back their output in the clearest sign yet that a growing glut of crude is overwhelming storage capacity.

As Bloomberg details, Plains All American Pipeline, one of the biggest shippers of crude in the U.S., sent a letter this week asking its suppliers to scale back production. The notice came from the company’s marketing unit that buys and sells oil to customers. At the same time, a Texas oil regulator said Saturday that drillers were getting similar notices from pipeline operators.

“We are sending this proactive request to our suppliers to ask that you take steps to reduce oil production in response to the pandemic,” Plains said in the letter obtained by Bloomberg. Good luck with that: in an industry geared to always producing, that's similar to asking the Nile to reverse course.

The company sent a separate letter requiring customers to prove they have a buyer or place to offload the crude they’re shipping, according to people familiar with the matter. Enterprise Products Partners LP put out a similar call, one person said. The firm didn’t immediately have comment. The idea is to prevent anyone from parking oil in pipelines, an unprecedented step which suggests pipeline are now convinced US commercial storage will soon be full, at which point oil producers will have no choice but to pay customers to take the oil or wreck unprecedented havoc on the US oil infrastructure.

If there is any confusion, Bloomberg explains the situation succinctly: "the messages signal the oil market is fast approaching the moment traders have been warning about - when crude supplies overflow storage tanks and pipelines as the coronavirus pandemic drags down oil demand by the most in history."

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Also on Saturday, Ryan Sitton, a member of the Texas Railroad Commission that regulates the state’s oil industry, said he’d heard that “some Texas producers are starting to get letters from shippers (pipelines) asking for oil production cuts because they are out of storage.”

There were already signs that North America’s storage system was nearing its limit. On Friday, prices for physical delivery of several key crude grades in North America plunged to the lowest levels in decades. West Texas Intermediate crude in the heart of the Permian shale region plunged to $13.01 a barrel, the lowest since 1999. Meanwhile, West Canada oil is just $5 away from turning negative.

It gets crazier: trading giant Mercuria Energy Group bid just 95 cents for Wyoming Asphalt Sour, a dense oil used mostly to produce paving bitumen, and said the same barrel was bid at below zero earlier this month.

Surprisingly this plunge in oil prices has yet to really hit the gas pump, perhaps because US oil refiners have been steadily cutting back on the amount of crude they buy and process as lockdowns across the nation keep cars off the road, sending gasoline demand plummeting.

Meanwhile, a new wave of defaults is coming as US shale producers have begun to anticipate the day their product will be rejected by intermediaries, and are throttling back drilling even if it means they are staring a bond default squarely in the face. That said, it could take weeks if not months before that translates into a meaningful decline in oil production. Meanwhile, America's largest oil-storage hub at Cushing, Oklahoma is already more than half full, and filling up at a furious pace.

Sitton has been pushing a plan that would have Texas imposing limits on its crude production as part of a deal with the Organization of Petroleum Exporting Countries. “We need to get in front of this,” he said on Twitter Saturday.

Ok, so ground storage is almost full but what about filling up all those tankers that are floating around aimlessly now that global demand has collapsed? After all it wouldn't be the first time the US commercial storage was nearly exhausted forcing tankers to be deployed as temporary warehouses of physical product?

Well, that's precisely what is going on. With the oil market falling into a so-called super contango, which means it is now profitable for traders to buy oil today, store it, and reap the profits by selling it at a higher price months or even years down the line, traders are scrambling to dump oil in portable storage. Firms including Vitol Group and Gunvor Group, two of the world’s largest oil traders, say there’s intense demand to keep barrels at sea.

Traders typically look to use the largest ships for oil storage as they are the most cost-effective. In recent days though, shipowners have also been receiving inquiries about smaller vessels that can hold a million barrels or fewer and for periods of time longer than 12 months, said International Seaways Chief Executive Officer Lois Zabrocky.

"This is a once-in-a-generation type of event," she said Thursday, quoted by OilandGas360.

As Bloomberg reported separately, citing Robert Hvide Macleod, CEO of tanker owner Frontline Management, "oil is going on ships at a speed never seen before," as a result of the market’s glut; he added that vessels are being filled at five times the pace of 2015, when oil market was last heavily oversupplied.  International Seaways, another owner, said on Thursday that the total volume of oil in floating storage may top 100 million barrels during this glut.

Why? Because the bottom line bears repeating: "The world is producing 20 million barrels of oil too much every day", or said otherwise there is no demand for roughly 20% of global output every single day. At this rate, how long before all the storage in Cushing, ARA and China is overflowing and every single tanker in the world is full?

And what happens to the oil price then? One thing is certain - there will be blood.

"There's No Gold" - COMEX Report Exposes Conditions Behind Physical Crunch

While the demand for gold has been soaring as a safe haven asset amid the multiple global crises we are currently facing, forced paper gold liquidation (as leveraged funds scramble to cover margin calls) and unprecedented logistical disruptions created a frantic hunt for actual bars of gold.

Specifically, as Bloomberg details, at the center of it all are a small band of traders who for years had cashed in on what had always been a sure-fire bet: shorting gold futures in New York against being long physical gold in London. Usually, they’d ride the trade out till the end of the contract when they’d have a couple of options to get out without marking much, if any, loss.

But the virus, and the global economic collapse that it’s sparking, have created such extreme price distortions that those easy-exit options disappeared on them. Which means that they suddenly faced the threat of having to deliver actual gold bars to the buyers of the contract upon maturity.

It’s at this point that things get really bad for the short-sellers.

To make good on maturing contracts, they’d have to move actual gold from various locations. But with the virus shutting down air travel across the globe, procuring a flight to transport the metal became nearly impossible.

If they somehow managed to get a flight, there was another major problem. Futures contracts in New York are based on 100-ounce bullion bars. The gold that’s rushed in from abroad is almost always a different size.

The short-seller needs to pay a refiner to re-melt the gold and re-pour it into the required bar shape in order for it to be delivered to the contract buyer. But once again, the virus intervenes: Several refiners, including three of the world’s biggest in Switzerland, have shut down operations.

“I realized it was going to be an extremely volatile day,” Tai Wong, the head of metals derivatives trading at BMO Capital Markets in New York, said of Tuesday. “We watched this panic develop literally over the course of 12 hours. Having seen enough market dislocations, you recognize that the frenzy wasn’t likely to last, but at the same time you also don’t know how long it would extend.”

By the end of the week, the shorts had sourced the metal and chartered flights, reverting the spot-futures spread...

But Morgan Stanley's Exchange-For-Physical Index shows a large physical premium remains...

The real price.. for real gold? Nearer $1,800. If you can get it.

“There’s no gold,” says Josh Strauss, partner at money manager Pekin Hardy Strauss in Chicago (and a bullion fan).

“There’s no gold. There’s roughly a 10% premium to purchase physical gold for delivery. Usually it’s like 2%. I can buy a one ounce American Eagle for $1,800,” said Josh Strauss. “$1,800!”

“The case for gold is simple,” says Strauss.

“You want to own gold in times of financial dislocation and or inflation. And that’s been the case since time immemorial. And gold behaves well in those cases. In those cases stocks behave poorly. It’s a great portfolio hedge. Gold does poorly when you’ve got strong economic growth and low inflation. Tell me when that’s going to happen. Gold held its value during 2008 and after all that money printing it tripled over the next three years.”

And in case you doubted this, the cost of an American Eagle one ounce coin at the US Mint is now $2,175...

But now we can see more details of what is behind this 'shortage' as SKWealthAcamdemy's J.Kim details, the latest COMEX Issues and Stops reports expose conditions behind the COMEX physical gold supply problems. Though I have written about the various reasons why physical gold supply problems manifest many times in the past, this topic still remains one rarely discussed by financial journalists, and never discussed by the mass financial media.

For client accounts, when bullion banks stop more notices than issued, they, will lose physical inventory.

For house accounts, the opposite is true.

When bullion banks issue more notices than stops, then they will lose physical inventory as well. Normally, when bullion banks manufacture waterfall declines in paper gold and silver prices, as they did earlier this month, with the complicity of the CME’s largely unreported rampage in raising initial and maintenance margins on futures contracts many times within a 2-month period in the midst of a stock market crash, they load up on physical gold and silver for their house accounts while ensuring that their clients take almost zero delivery of physical gold and silver ounces. However, if they are unable to execute this clever strategy, this is when physical gold supply problems can manifest.

In fact, I have not seen a single news site in the entire world, except for my own, mention the relentless increase in initial and maintenance margins in gold and silver futures contracts (the 100-oz gold futures contract and the 5000-oz silver futures contract) for the past two months, in a desperate attempt to knock long positions out of the game and thereby prevent an increasing amount of physical delivery requests.

Just recently, the CME raised margins yet again for 100-oz gold futures contracts to $9,185/$8,350 for initial/maintenance margins, representing a massive 86% increase in margins, and for 5000-oz silver futures contracts to $9.900/$9,000 for initial/maintenance margins, representing a gigantic 73% increase in margins, in just a couple months’ time. Normally, such relentless increases in initial/maintenance margins in gold futures markets is sufficient to prevent physical gold supply problems from afflicting futures markets, but the fact that even this reliable manipulation mechanism failed recently is a sign of additional tectonic earthquakes to come in the global financial system.

However, as you can see for the data I have compiled for the behavior of issues and stops for client and house accounts for bullion banks in gold and silver from December 2019 to March 2020, this pattern of normal behavior, in which bullion banks take advantage of their own artificially manufactured paper gold and silver price plunges to load up on physical metals at the expense of their clients, has strongly reversed during this four-month time span. I have only included data for the major gold (100-oz) and silver (5000-oz) futures contracts below and not for the mini gold (10-oz) and mini silver (1000-oz) silver futures contracts. 

Furthermore, I only separated out the bullion banks by name that had several hundred to a few thousand contracts stopped or issued, and compiled all other data under the category of “all others”. For those of you that don’t understand the terminology “stopped” and “issued”, the categories refer to the number of delivery notices that were “issued” (short positions issuing notification that underlying gold/silver would be delivered) and “stopped” (long positions receiving a delivery notice).

Therefore, when delivery notices are “issued” in house accounts, the issuing bank is on the hook for delivering the physical ounces associated with the underlying contracts. On the contrary, when notices are “stopped”, then the stopping bank would receive notification of the future delivery of the physical ounces associated with the underlying contracts. The same holds true for client accounts. Thus, all bullion banks desire more stopped than issued notices for their house accounts, and desire more issued versus stopped notices for their client accounts. This way they accumulate more physical inventory during artificially engineered paper price crashes.

As you can see, the massive engineered drop in paper silver prices versus the massively higher physical silver prices for the past month backfired on the bullion banks, as it led to a frenzy of clients asking for physical delivery, whereas in the past, bankers had been able to chase client long positions out of the market without ever being on the hook for physical delivery. Thus the amount of contracts stopped versus issued for clients was nearly break even for silver futures contracts, a pattern I have not witnessed in a long time during a banker raid on paper silver prices.  And in regard to house accounts, under past similar circumstances, I had always observed JP Morgan bankers taking a tremendous amount of physical silver delivery during engineered collapses in paper silver prices. However, during the last four months, this situation did not materialize, perhaps due to the stress on physical stores of silver created by so many clients asking for physical delivery. As you can see in the data I complied above, this time around, JP Morgan bankers were nearly absent in taking physical silver delivery for their house account.  In fact, for the bullion bank house accounts, the amount of stopped versus issued contracts, net, was only 74 contracts, or a mere 395,000 AgOzs for their House accounts. As a basis of comparison, during similarly engineered collapses in paper silver prices in the past, JP Morgan alone was able to accumulate and take delivery of many millions of physical silver ounces.

In regard to real physical gold delivery, the situation was even worse for bullion bankers than their situation with real physical silver delivery, which likely has given rise to physical gold supply problems at the current time. In their client accounts, physical delivery requests exploded, with the net (stopped minus issued) totaling 8,095 contracts representing 800,950 AgOzs of real physical gold requested for delivery. In their house accounts, the bullion banks were unable to yield a positive net situation either, with issued contracts exceeding stopped contracts by 6,107 contracts, representing 610,700 AgOzs.  Thus, when adding these two figures together, the bullion banks are on the hook for delivering more than 1.4M AgOzs.

This unexpected demand on bullion bank physical gold reserves has undoubtedly led to a disruption of physical gold delivery associated with the gold futures markets, though various COMEX spokespeople have claimed there is no shortage of physical gold whatsoever, and that the disruption of delivery is simply due to a disruption in the supply chain caused by the coronavirus pandemic, i.e., when in doubt, blame the coronavirus pandemic for all manifested stresses revealed in the global financial system. Earlier, here, on 24 February, I speculated, well before US stock markets started to crash, that the coronavirus pandemic would be scapegoated for the market crash, and I was 100% right.  Is it possible that the coronavirus pandemic is now being scapegoated for shortages of physical gold as well?

Oddly, a gold analyst, Ole Hanson stated in response to the shortages of gold physical supply in the futures markets: “There is plenty of gold in the market, but it's not in the right places. Nobody can deliver the gold because we are forced to stay home." The explicit function of COMEX warehouses is to store the physical gold that backs gold delivery associated with gold futures contracts. Consequently, why is the physical gold “not in the right places” and in these warehouses, as if it is stored where it is supposed to be stored, and the data is accurate (1.76M registered AuOzs and an additional 6.98M eligible AuOzs in COMEX warehouses as of 26 March 2020), there should be no physical gold shortages to meet physical demand right now? Did Mr. Hanson, in his statement that gold is “not in the right places” unwittingly reveal that the reported COMEX warehouse data is fraudulent?

Secondly, some would suggest that ever since the COMEX mandate that paper gold could be used to close out physical delivery requests through EFP (Exchange For Physical) transactions by Exchange Rule 104.36 enacted on February 18, 2005, which allowed for the substitution of gold ETFs for physical gold, that no physical shortage of gold could ever result.

Since paper was allowed to replace physical, could not bullion banks just literally “paper over” any physical supply deficit? And if the answer to this question is yes, then why is the COMEX experiencing physical shortages of gold right now? Well, as I explained in an article that I published on my news site in June 2011, in which I explained how EFP transactions operate (which you can read here), “the Related Position [Physical] must have a high degree of price correlation to the underlying of the Futures transaction so that the Futures transaction would serve as an appropriate hedge for the Related Position [Physical].”  Consequently, since there has been a massive price decoupling between physical and paper gold prices, perhaps this price decoupling has enabled the underlying holder of longs in gold that asked for physical delivery to reject any EFP transaction, since there is no longer a “high degree of price correlation” between paper and physical gold, and to insist on physical gold delivery with no substitution for this request. And this rejection of EFPs and EFS (exchange for swaps) as acceptable behavior is perhaps what is causing the physical gold supply problems in the futures markets right now.

The Great Dollar Shortage

The coronavirus pandemic is a human tragedy. It’s also an economic tragedy, as the global economy is collapsing around us.

Second-quarter U.S. GDP may drop as much as 30%, which is a staggering figure. Many economists predict a third-quarter recovery, but there are still so many unknowns that it’s impossible to say.

It’s still too soon to say when America will reopen for business. And you can’t just flip a switch and return things to normal. That’s not how economies function.

Many industries may never recover and millions may be out of work for extended periods.

At the very least, we’re heading into a severe recession. And we could well be heading for a full-scale depression.

That’s not being alarmist.\

The crisis will also accelerate the collapse of the dollar as the world’s leading reserve currency. So you need to prepare now. What do I mean?

The U.S. dollar is at the center of global trade.

The dollar represents about 60% of global reserve assets, 80% of global payments and almost 100% of global oil sales. About 40% of the world’s debt is issued in dollars.

The Bank for International Settlements (BIS) estimates that foreign banks hold over $13 trillion in dollar-denominated assets.

All this, despite the fact that the U.S. economy only accounts for about 15% of global GDP.

The reason the dollar is the world’s leading reserve currency is because there’s a very large liquid dollar-denominated bond market. Investors can go buy 30-day 10-year, 30-year Treasury notes, etc. The point is there’s a deep, liquid dollar-denominated bond market.

But the coronavirus crisis is creating a massive problem for foreign nations dependent on the dollar.

That’s because the world is facing a critical dollar shortage.

Many observers are surprised to hear about a dollar shortage. After all, didn’t the Fed print almost $4 trillion to bail out the system after 2008?

Yes, but while the Fed was printing $4 trillion, the world was creating $100 trillion in new debt.

This huge debt pyramid was fine as long as global growth was solid and dollars were flowing out of the U.S. and into emerging markets.

But that’s no longer the case, and that’s an understatement. Global growth was anemic before the crisis hit. Now it’s contracting rapidly.

If dollars are in short supply, China can’t control its currency and emerging markets can’t roll over their debts.

But again, you might say, isn’t the Fed engaged in its most massive liquidity injections ever and extending swap lines to foreign central banks to ensure they can access dollars?

Yes, but it’s not nearly enough to meet global funding needs.

Foreign nations are scrambling to acquire dollars right now. And that surging demand for dollars only drives up the value of the dollar, which puts additional strain on their ability to service debt.

When those debt holders want their money back, $4 trillion is not enough to finance $100 trillion, unless new debt replaces the old. That’s what causes a global liquidity crisis.

We’re facing a global liquidity crisis far worse than the one that occurred in 2008. In fact, the world is heading for a debt crisis not seen since the 1930s.

The trend away from the dollar was already underway before the latest crisis, led by China and Russia. Now that trend will greatly accelerate as the world seeks to eliminate, or greatly reduce, its dependence on the dollar.

That’s not just my opinion, by the way. Here’s what Eswar Prasad, former head of the IMF’s China team, says:

“The dollar’s surge will renew calls for a shift from a dollar-centric global financial system.”

It can happen much faster than you think. And the dollar’s days are more numbered now than ever.

But what will replace it? And why can you expect the dollar to lose up to 80% of its value in the years ahead?

Remember, nothing lasts forever...

Cesium - The Most Important Metal You’ve Never Heard Of

The 5G revolution, American military defense, and even time itself are dependent on this one critical metal that China monopolizes and that the U.S. is desperate to get more of. 

The metal is Cesium, and it’s quite possible you’ve never even heard of it--yet, global dominance, which depends on technological superiority, can’t happen without it.

In May 2018 Cesium was added to the list of critical minerals by the United States Department of the Interior. 

In fact, there are 16 metals in total that are absolutely critical to high-tech industries, military applications and telecommunications--and China controls the supply of every single one because it controls 96% of production.

That includes cesium, for which China has a monopoly on stockpiles, mines aren’t really producing anymore, and the United States has none, leaving North America’s only hope in Canada.   

Of five cesium occurrences in Canada’s Ontario province, a small-cap Canadian miner called Power Metals (TSX:PWM.V, OTCMKTS:PWRMF) owns 100% of three of them (West Joe, Tot Lake and Marko).

Time Is Running Out for This Most Strategic of Metals 

Cesium is so secretive and obscure that it’s nearly impossible to track its real market price. 

It’s strategic in and of itself, but its rarity makes it even more critical. 

The supreme technological war of global dominance can’t be won without these metals, so whoever controls them has the upper hand. 

Cesium is described by the German Institute for Strategic Metals (ISE) as “the most electropositive of all stable elements in the periodic table”, and the heaviest of the stable metals. Cesium is “extremely pyrophoric, ignites spontaneously when in contact with air, and explodes violently in water or ice at any temperature above -116 ° C”.

The strategic metal’s applications in the healthcare industry are expected to soar as laboratories already use cesium compounds in medical imaging, cancer therapy, positron emission tomography (PET) and others. 

The latest market analysis by Technavio predicts the cesium market will grow by 1.66 thousand MT between 2020 and 2014, driven by everything from catalyst promoters, glass amplifiers, photoelectric cell components, crystals in scintillation counters, and getters in vacuum tubes. 

Much cesium demand also comes from the oil and gas industry, which uses cesium formate brines in drilling fluids to prevent blow-outs in high-temperature, over-pressurized wells. 

In terms of world dominance, the “cesium standard” is the key. This is the standard by which the accurate commercially available atomic clocks measure time, and it’s vital for the data transmission infrastructure of mobile networks, GPS and the internet. 

That means it has serious defense applications as well, including in infrared detectors, optics, night vision goggles and much, much more. A cesium laser has even been invested for use in missile defense and other technological applications. 

So, imagine China being able to starve manufacturers of something like cesium, which would seriously disrupt U.S. industry and hinder the development of critical military equipment. 

That’s why, finally, in December 2019, the United States and Canada agreed on a strategy to reduce the need for rare-earth metals mined or controlled by China. 

Wide Open Playing Field

The only company in the cesium supply chain right now is Chinese, and one of the only companies on the radar for potential commercial cesium supplies in North America is Canadian junior Power Metals, which is hoping to prove that it’s sitting on the world’s fourth deposit of the critical metal. 

The company discovered the pegmatites at West Joe Dyke in August 2018, intersecting high-grade cesium mineralization in six drill holes when it was targeting lithium instead. 

So, the focus now is not on what has been lost to China, but the promise of new North American critical cesium. 

But Dr. Julie Selway, a key geologist for the Ontario Geological Survey during the tantalum boom of the early 2000s, and now VP of exploration for Power Metals, says the three properties the company is drilling are likely to have similar finds as the strategically important Sinclair mine in Australia. 

“They are shipping their resource, which they say is higher than 10% cesium-oxide, and ours have some that are between 12% and 14% of cesium-oxide,” Selway--one of the world’s most renowned experts on pegmatites--told Oilprice.com. 

Power Metals has intersected cesium (Cs) mineralization in 6 drill holes on West Joe Dyke, with “exceptionally high-grade” Li and Ta intervals. They also found Cs mineralization in drill core in the first new dyke below Main Dyke, as well as in the drill core in Northeast Dyke. 

On February 20th, Power Metals announced its exploration plans, and will begin stripping and channel sampling on West Joe Dyke in the Q2 of this year already. That’s when they’ll expose, sample and assay the cesium mineralization on surface outcrops to find more cesium-bearing pegmatite dykes nearby. 

This is one big chance to one-up Beijing, which, according to the Wall Street Journal, has tried to manipulate the market so critical metals such as Cesium are cheaper in China than outside the country. What this did was prompt some major manufacturers and tech industries to set up shop in China, where they could get supplies at a lower cost. 

You might not have heard of cesium before, but you will hear about it soon because North America needs its own supply if it’s going to win the war for global technological dominance--and the front line of defense could end up being West Joe Dyke, and a junior explorer that not only thinks strategically, but may be sitting on one of the only deposits that China doesn’t control.