Category: Nieuws

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Costly Electric Vehicles Confront a Harsh Coronavirus Reality

For automakers who have invested heavily in a shift to high tech, there’s no turning back.

By Christoph Rauwald and Bruce Einhorn, 27 May 2020 (Bloomberg)

At a factory near Germany’s border with the Czech Republic, Volkswagen AG’s ambitious strategy to become the global leader in electric vehicles is coming up against the reality of manufacturing during a pandemic.

The Zwickau assembly lines, which produce the soon-to-be released ID.3 electric hatchback, are the centerpiece of a plan by the world’s biggest automaker to spend 33 billion euros ($36 billion) by 2024 developing and building EVs. At the site, where an East German automaker built the diminutive Trabant during the Cold War, VW eventually wants to churn out as many as 330,000 cars annually. That would make Zwickau one of Europe’s largest electric-car factories—and help the company overtake Tesla Inc. in selling next-generation vehicles.

But Covid-19 is putting VW’s and other automakers’ electric ambitions at risk. The economic crisis triggered by the pandemic has pushed the auto industry, among others, to near-collapse, emptying showrooms and shutting factories. As job losses mount, big-ticket purchases are firmly out of reach—in the U.S., where Tesla is cutting prices, more than 36 million people have filed for unemployment since mid-March. Also, the plunge in oil prices is making gasoline-powered vehicles more attractive, and some cash-strapped governments are less able to offer subsidies to promote new technologies.

Even before the crisis, automakers had to contend with an extended downturn in China, the world’s biggest auto market, where about half of all passenger EVs are sold. Total auto sales in China declined the past two years amid a slowing economy, escalating trade tensions, and stricter emission regulations. EV sales are forecast to fall to 932,000 this year, down 14% from 2019, according to BloombergNEF. The drop-off is expected to stretch into a third year as China’s leaders have abandoned their traditional practice of setting an annual target for economic growth, citing uncertainties. Economists surveyed by Bloomberg expect just 1.8% GDP growth this year.

Global Passenger Vehicle Sales

The global market contraction raises the prospect of casualties. French finance minister Bruno Le Maire has warned that Renault SA, an early adopter of electric cars with models like the Zoe, could “disappear” without state aid. Even Toyota Motor Corp., a hybrid pioneer when it first introduced the Prius hatchback in 1997, is under pressure. The Japanese manufacturer expects profits to tumble to the lowest level in almost a decade.

Automakers who for years have invested heavily in a shift to a high-tech future—including autonomous vehicles and other alternative energy-based forms of transportation such as hydrogen—now face a grim test. Do their pre-pandemic plans to build and sell electric cars at a profit have any chance of succeeding in a vastly changed economic climate? Even as Covid-19 has obliterated demand, for the car makers most committed to electric, there’s no turning back.

“We all have a historic task to accomplish,” Thomas Ulbrich, who runs Volkswagen’s EV business, said when assembly lines restarted on April 23, “to protect the health of our employees—and at the same time get business back on track responsibly.”

Volkswagen Pushes Ahead

Global EV sales will shrink this year, falling 18% to about 1.7 million units, according to BloombergNEF, although they’re likely to return to growth over the next four years, topping 6.9 million by 2024.

“The general trend toward electric vehicles is set to continue, but the economic conditions of the next two to three years will be tough,” said Marcus Berret, managing director at consultancy Roland Berger.

Volkswagen’s Zwickau facility became the first auto plant in Germany to resume production after a nationwide lockdown started in March. Before restarting, the company crafted a detailed list of about 100 safety measures for employees, requiring them to, among other things, wear masks and protective gear if they can’t adhere to social-distancing rules.

The cautious approach has reduced capacity—50 cars per day initially rolled off the Zwickau assembly line, roughly a third of what the plant manufactured before the coronavirus crisis. (VW said Wednesday that daily output had risen to 150 vehicles, with a plan to reach 225 next month.) Persistent software problems also have plagued development of the ID.3, one of 70 new electric models VW group is looking to bring to market in the coming years.

Still, Ulbrich and VW CEO Herbert Diess over the past three months have reaffirmed Volkswagen’s commitment to electrification. “My new working week starts together with Thomas Ulbrich at the wheel of a Volkswagen ID.3 – our most important project to meet the European CO2-targets in 2020 and 2021,” Diess wrote in a post on LinkedIn in April. “We are fighting hard to keep our timeline for the launches to come.”

Diess has described the ID.3 as “an electric car for the people that will move electric mobility from niche to mainstream.” Pre-Covid, the company had anticipated that 2020 would be the year it would prove its massive investments and years of planning for electric and hybrid models would start to pay off.

A more pressing worry that could hamper VW’s ability to scale up production is its existing inventory of unsold vehicles. The cars need to move to make room for new releases, but sales are down as consumers are tightening their spending. One response has been to offer improved financing in Germany, including optional rate protection should buyers lose their jobs. VW also has adopted new sales strategies first used by its Chinese operations, such as delivering disinfected cars to customer homes for test drives, and expanding online commerce.

Other German automakers are similarly pushing ahead with EV plans. Daimler AG is sticking to a plan to flank an electric SUV with a battery-powered van and a compact later this year. BMW AG plans to introduce the SUV-size iNEXT in 2021 as well as the i4, a sedan seeking to challenge Tesla’s best-selling Model 3.

A potential obstacle for all these companies—apart from still patchy charging infrastructure in many markets—is the availability of batteries. Supply bottlenecks appear inevitable given that the number of electric car projects across the industry outstrip global battery production capacity. And boosting cell manufacturing is a complicated task.

China’s (Weakened) EV Dominance 

For VW and others, the first big test of EVs’ appeal in a Covid-19 world will come in China. Diess has referred to China as “the engine of success for Volkswagen AG.” VW group deliveries returned to growth year-on-year last month in China, while all other major markets declined.

Not long ago, China appeared to be leading the world toward an electric future. As part of President Xi Jinping’s goal to make the country an industrial superpower by 2025, the government implemented policies that would boost sales of EVs and help domestic automakers become globally competitive, not just in electric passenger cars but buses, too.

With the outbreak seemingly under control in much of the country, China is seeing some buyers return to the showrooms, but demand for passenger cars is likely to fall for the third year in a row, putting startups like NIO Inc. at risk and hurting more-established players like Warren Buffett-backed BYD Co., which suffered from a 40% year-on-year vehicle sales decline in the first four months of 2020.

The Chinese auto market may shrink as much as 25% this year, according to the China Association of Automobile Manufacturers, which before the pandemic had been expecting a 2% decline. EV sales fell by more than one-third in the second half of 2019.

NIO, the Shanghai-based startup that raised about $1 billion from a New York Stock Exchange initial public offering in 2018 but lost more than 11 billion yuan ($1.5 billion) last year, was thrown a much-needed lifeline when a group of investors, including a local government in China’s Anhui Province, offered 7 billion yuan last month.

Other Chinese manufacturers are counting on support from the government, too, including tax breaks and an extension to 2022 of subsidies, originally scheduled to end this year, to make EVs more affordable.

For now, the government will also look to help makers of internal combustion engine vehicles, at least during the worst of the crisis, said Jing Yang, director of corporate research in Shanghai with Fitch Ratings. But, she said, “over the medium-to-long term, the focus will still be on the EV side.”

America is Tesla Country

Companies can’t count on that same level of support from President Donald Trump in the U.S., where consumers who love their SUVs and pickup trucks have largely steered clear of electric vehicles other than Tesla’s.

The U.S. lags China and Europe in promoting the production and sale of EVs, and that gap may widen now that Americans can buy gas for less than $2 a gallon.

“When you’re digging out of this crisis, you’re not going to try to do that with unprofitable and low-volume products, which are EVs,” said Kevin Tynan, a senior analyst with Bloomberg Intelligence.

Weeks after announcing plans to launch EVs for each of its brands, General Motors Co. delayed the unveiling of the Cadillac Lyriq EV originally planned for April. Then on April 29, the company said it would put off the scheduled May introduction of a new Hummer EV. The models are part of CEO Mary Barra’s strategy to spend $20 billion on electrification and autonomous driving by 2025, to try to close the gap with Tesla.

In another move aimed at winning over Tesla buyers, Ford Motor Co. unveiled its electric Mustang Mach-E last November at a splashy event ahead of the Los Angeles Auto Show. The highly anticipated model had been scheduled to debut this year. Ford has not officially postponed the release, but the company has said all launches will be delayed by about two months, potentially pushing the Mach-E into 2021.

Elon Musk, whose cars dominate the U.S. electric market, cut prices by thousands of dollars overnight. The Model 3 is now $2,000 cheaper, starting at $37,990. The Model S and Model X each dropped $5,000.

Musk engaged in a high-profile fight with California officials this month over Tesla’s factory in Fremont, California, which had been closed by shutdown orders Musk slammed as “fascist.” In a May 11 tweet, he said the company was reopening the plant in defiance of county policy. On May 16, Tesla told employees it had received official approval.

During most of the shutdown in California, the company managed to keep producing some cars thanks to better relations with local officials regulating its other factory, in Shanghai. That plant closed as the virus spread from Wuhan in late January, but the local government helped it reopen a few weeks later in early February.

First Zwickau, Then the World

The ID.3’s new electric underpinning, dubbed MEB, is key to VW’s strategy to sell battery-powered cars on a global scale at prices that will be competitive with similar combustion-engine vehicles. Automakers typically rely on such platforms to achieve economies of scale and, ultimately, profits. MEB will be applied to purely electric vehicles across all of the company’s mass-market brands, including Skoda and Seat.

VW said it spent $7 billion developing MEB after Ford last year agreed to use the technology for one of its European models. Separately, the group’s Audi and Porsche brands are built on a dedicated EV platform for luxury cars that the company says will be vital in narrowing the gap with Tesla.

VW plans to escalate its electric-car push by adding two factories, near Shanghai and Shenzhen, that it says could eventually roll out 600,000 cars annually, more cars than Tesla delivered globally last year.

While China is the initial goal, making a dent in Europe and the U.S. is the long-term one. Like China, Europe had been tightening emissions regulations significantly before the pandemic. New rules to reduce fleet emissions will gradually start to take effect this year, effectively forcing most manufacturers to sell plug-in hybrids and purely electric cars to avoid steep fines.

Because of the mandates, Europe’s commitment to electrification isn’t going away, said Aakash Arora, a managing director with Boston Consulting Group. “In the long term, we don’t see any relaxation in regulation,” he said.

For VW, this crisis wouldn’t be the first time it started a new chapter in difficult times. Diess saw an opportunity coming off the manufacturer’s years-long diesel emissions scandal that cost the company more than $33 billion to win approval for the industry’s most aggressive push into EVs. When VW unveiled the ID.3, officials compared its historic role to the iconic Beetle and the Golf, not knowing that this might hold in unintended ways: The Beetle arose from the ashes of World War II, and the Golf was greeted by the oil-price shock in the 1970s.

“We have a clear commitment to become CO2 neutral by 2050,” VW strategy chief Michael Jost said, “and there is no alternative to our electric-car strategy to achieve this.”

  • With assistance by Keith Naughton
  • Photo by Eduardo Arcos on Unsplash

Oil Firms Among Worst Hit As Wave Of Bankruptcies Hits Texas

Oil and gas companies, as well as the retail industry, are the worst hit sectors in the COVID-19 pandemic that swept through businesses in Texas, bankruptcy and restructuring lawyers say.

According to data provided exclusively to The Texas Lawbook by Androvett Legal Media research, more than 545 companies of all sectors in Texas filed for Chapter 11 protection from creditors between January 1 and May 5, 2020. This is a surge of 133 percent compared to the same period of 2019, Mark Curriden at The Texas Lawbook writes in Houston Chronicle.

Within Texas, Houston is the center of the wave of bankruptcies, which include many names in the retail and oil industries, according to the data and to bankruptcy partners at law firms.

In April, companies such as Diamond Offshore Drilling and Whiting Petroleum filed for Chapter 11 bankruptcy protection. U.S. shale gas pioneer Chesapeake Energy said in May it was evaluating a Chapter 11 bankruptcy protection reorganization—along with other options—as the low oil and gas prices weigh heavily on its finances and substantial outstanding debt.

The list is set to grow in coming weeks, according to legal experts.

“Oil and gas and the retail sector had a whole lot of stress even before COVID-19. The only surprising thing is that we haven’t seen the explosion of bankruptcy filings already. But they are still coming,” Lou Strubeck, head of the bankruptcy and restructuring practice at Norton Rose Fulbright, told The Texas Lawbook’s Mark Curriden.

According to Strubeck, creditors are not rushing for court reorganizations of energy companies because “they don’t know what they would do with the assets and they don’t want to run these companies.”

With less capital to invest in bankruptcy restructuring of oil firms than in the 2015-2016 downturn, private equity could sit on the sidelines, and we may see more “free fall” bankruptcies and fewer prepackaged bankruptcies, Matthew Cavanaugh, a bankruptcy partner with Jackson Walker in Houston, told The Texas Lawbook.

By Tsvetana Paraskova, May 25 for Oilprice.com

Here’s Why Oil Isn’t Likely to Go Negative Again This Month

Investors were shocked on April 20 when oil futures set for May delivery fell below zero for the first time ever . Although the negative oil prices lasted less than 24 hours, the plunge started a debate about whether it could happen again this month with the June futures.

In the days after the price first plunged, some analysts predicted it could happen again , because the dynamics in the market weren’t expected to change. But that now looks increasingly unlikely—both because of the dynamics of crude trading and because the oil market isn’t in as dire straits as it was two weeks ago. West Texas Intermediate crude futures have rallied more than 40% this month, to above $23 a barrel.

“No June will not go negative,” Richard Redoglia, CEO of Matrix Global, wrote in an email. “It might see some weakness, but the panic is over.” Matrix Global runs auctions for crude storage space.

To see why, it helps to understand oil trading.

West Texas futures—the financial instrument that went negative—give investors a unique way to track the oil market. They are contracts that result in the buyer receiving barrels of crude oil after the contracts expire. By comparison, Brent crude, the international oil benchmark, settles in cash. People who own West Texas crude on the day the contracts expire have to be prepared to receive 1,000 barrels of oil. Usually, that isn’t a problem because buyers can rent storage tanks in Cushing, Okla., the delivery point. But in April, all of the storage in Cushing was booked, so traders who were still holding the contract near expiration couldn’t put it anywhere. And no one wanted to buy the contracts. So they fell to negative $40 a barrel, implying that sellers would pay buyers $40,000 per contract.

Some of those dynamics are still in place. Covid-19 shutdowns have led to reduced oil demand, so oil producers have nowhere to put the oil they are pumping out. Instead of refining it into gasoline, they are putting more of it into storage. So storage is still tight in Cushing. People holding June futures won’t find much storage available for purchase.

But other dynamics make a negative prices less likely. For one thing, traders know that negative prices are theoretically possible. Before April, it wasn’t clear to many traders that negative prices were possible; the Chicago Mercantile Exchange adjusted its computer systems to allow for normal trading at negative prices in April. “The element of surprise is gone,” CFRA Research analyst Stewart Glickman wrote in an email.

Going into the weekend before the expiration of the May contract, there were more than 100,000 open contracts still trading. Many of those people probably expected to be able to sell them or roll those contracts over to the June contract. But come Monday, no one wanted to touch the May contracts, because they were trading at a deep discount to the June contracts. The pattern is known as contango, where oil set for delivery in future months is worth more than it is today, because people expect more people to be using oil in the future (in this case, because Covid-19 shutdowns are expected to ease).

Oil is still in contango today, but it isn’t nearly as steep as it was then. At its height, the spread between the June and July contract was about $6. Today, that spread is less than $2. And the biggest crude buyers have mostly avoided buying into the June contract, instead shifting their bets to July. The U.S. Oil Fund exchange-traded fund (ticker: USO), the most popular way for investors to bet on the price of crude, has already rolled out of the contract and into later-dated months. Open interest in the June contract is at less than half the level it was for the May contract at the same point, according to a report from ING on Thursday.

That has made the June contract less precarious. If most traders move out of it early, there won’t be many stuck looking for storage on the date of expiration again.

The new dynamic suggests that “market participants who do not have the capability to take physical delivery will likely not hold their position in the final days of the contract’s life,” Warren Patterson, head of commodities strategy at ING, wrote in the report.

Beyond the trading dynamics, the oil market has been moving closer toward balance in recent days. Producers around the world have cumulatively reduced their output by more than 10%, and demand has slowly started to return as countries have begun reducing restrictions on movement. As oil held in storage starts getting used for gasoline and diesel, Cushing tanks may open up too.

Nonetheless, some analysts think the recent rally in oil prices could fade. Glickman doesn’t expect oil to go negative, but he also doesn’t expect things to be hunky-dory for a while.

“With all that said, I’m still not a believer in this oil rally,” he wrote. “Prices don’t have to go negative to worry about rising storage and terrible visibility about the extent to any demand recovery.”

By Avi Salzman from Barron’s on May 7, 2020

Independent ARA Stocks Recover on the Week

May 22, 2020 – The volume of oil products held independently in storage in the Amsterdam-Rotterdam-Antwerp (ARA) refining and trading hub rose the past week, according to consultancy Insights Global.

Inventories of almost all surveyed products rose on the week to yesterday, with only fuel oil inventories down.

Fuel oil stocks on the week, amid a rise in export interest for the product in northwest Europe. The Suezmax tanker Leonid Loza departed the ARA region on 17 May with fuel oil, which it could deliver to Singapore, according to data from oil analytics firm Vortexa. And the very large crude carrier (VLCC) Amyntas also loaded from Rotterdam on 17 May, but is yet to declare its destination. Fuel oil cargoes also departed ARA for the Caribbean, where it could go into storage, potentially for local bunkering. Fuel oil was also spotted departing ARA tanks for a voyage to Saudi Arabia, where high-sulphur fuel oil is typically burned for power generation.

Gasoline stocks rose on the week, their highest since at least 2011. The stock build came even as export interest for northwest European gasoline increased, probably driven by continued contango structure, where prompt prices are weaker than those for future delivery, which is incentivising putting gasoline and blending components into storage. Gasoline cargoes departed ARA for typical export destinations the US and west Africa, but vessels were also heading for the Suez canal for voyages to Asia, including China. Transatlantic gasoline bookings have surged this month, as European exporters look to the US — where demand has shown signs of improvement — to clear supplies.

Independently-held gasoil stocks rose, their highest since October, as traders look to take advantage of the contango structure by putting product into tank. Gasoil entered ARA storage from India, Norway, Russia and Saudi Arabia this week, while outflows were recorded to the UK. The rise in inventories came even as gasoil flows up the Rhine to inland markets reached their highest weekly level since at least 2017, according to Insights Global data. Diesel in the inland truck market has traded premiums to ARA barge prices — up by around 18pc from January-February premiums — as German imports have remained robust in the face of low consumer demand.

Jet fuel inventories rose to their highest since May 2017. Jet fuel arrived at ARA from Saudi Arabia and the UAE principally, and departed for the UK. End-user jet kerosine demand remains extremely weak as a result of travel restrictions linked to the Covid-19 pandemic. Jet fuel could arrive in northwest Europe from east of Suez in May, which would be the highest this year, according to Argus tracking data.

Naphtha inventories rose on the week, as an Aframax tanker delivered the product from Algeria, in addition to inflows from Russia and the UK. No naphtha outflows were recorded, amid suggestions that naphtha demand from the petrochemical sector has been weak, leading to a reversal in the typical flow of naphtha up the Rhine to petrochemical units.

Reporter: Robert Harvey

Independent ARA Oil Product Stocks Fall Back

May 14, 2020 – The volume of oil products held independently in storage in the Amsterdam-Rotterdam-Antwerp (ARA) refining and trading hub fell during the past week, after reaching four-year highs a week earlier.

Inventories of all surveyed products fell on the week. Gasoline stocks fell most heavily on an outright basis, with inventories decreasing by on the week. Tankers departed the area for China, the Mediterranean, Port Said for orders, the US and west Africa. Demand from the US has increased over the past week as more states ease the restrictions originally prompted by the Covid-19 outbreak. Tankers arrived from France, Spain and the UK.

Naphtha stocks fell most heavily in percentage terms, dropping on the week. The volume of naphtha leaving the ARA for inland destinations along the river Rhine was low, and inventories inland remained high. Tankers arrived in the ARA area from Algeria, Russia and the UK and none departed.

Jet fuel stocks fell on the week. Low consumer demand brought refining margins to fresh all-time lows on 13 May. Negative jet fuel margins across the globe have resulted in refiners maximising diesel output at the expense of jet fuel, reducing the overall volume of jet fuel produced. A cargo departed the ARA area for the UK and none arrived.

Gasoil inventories fell. The flow of gasoil barges up the river Rhine reached its highest level since September, supported by an increase in Rhine water levels and higher consumer demand for diesel inland. But diesel margins remained at four-year lows on high stocks around the continent.

Fuel oil stocks were effectively stable on the week, falling slightly. Local demand for bunker fuels provided little outlet for fuel oil, but tankers did depart for the Mideast Gulf, the Mediterranean and the North Sea for orders. An Aframax arrived from Russia, while smaller cargoes arrived from Denmark, Finland, Italy and the UK.

Reporter: Thomas Warner

Independent ARA Oil Product Stocks Hit Four-Year Highs

May 7, 2020 – The volume of oil products held independently in storage in the Amsterdam-Rotterdam-Antwerp (ARA) refining and trading hub rose during the past week to reach their highest since April 2016, according to the latest data from consultancy Insights Global.

Overall stocks reached their highest since 7 April 2016 during the week to yesterday, with inventories of all surveyed products rising for a second consecutive week. The week on week increase meant that total inventories have now risen since underlying crude prices began plummeting in early March. Falling crude prices and low consumer demand prompted a steep contango in the forward curves of the relevant markets, making storage the most attractive course of action for many market participants. Inventories of most products have reached high capacity, with the remaining tank space already fully allocated.

Fuel oil and naphtha inventories reached their highest since Argus began recording the data from Insights Global in January 2011. Fuel oil stocks rose on the week. Low demand for bunker fuels locally and high freight costs closing the arbitrage route to Asia-Pacific provided little outlet for fuel oil. And tankers arrived carrying cargoes from France, Sweden, the UK and the US.

Naphtha stocks rose, after a fall in demand from petrochemical end-users along the river Rhine. Rival petrochemical feedstocks are being used in increasing quantities by end-users around Europe, and BASF even offered a naphtha cargo in the afternoon trading window on 5 May. And naphtha demand from gasoline blenders was also very low during the reporting period, weighed down by poor road fuel demand. Tankers arrived from Algeria, Norway, Russia and the UK while none departed.

Gasoline inventories reached their highest since January 2019, but came within of their highest level on record. Outflows to China, where the recovery in end-user demand is further advanced than it is in Europe, remained high. Tankers also departed for the US, west Africa and Mexico. Tankers arrived in the ARA area from Denmark, France, Italy, Russia and the UK.

Gasoil inventories reached their highest since January 2020. The volume of gasoil arriving on tankers fell slightly on the week but remained high, with tankers arriving from Norway, Russia, Singapore and the US. Demand from inland also slowed on the week, impacted by increasing competition for barges as water levels fall and market participants work to move cargoes between tanks to make space for incoming tanker cargoes.

Jet fuel stocks reached their highest since July 2019, with low consumer demand again making storage the only real outlet for cargoes. The volume arriving in the area rose on the week, with tankers arriving from Asia-Pacific as well as Singapore. Jet fuel refining margins turned negative in northwest Europe on 4 May for the first time ever on low demand and rising inventories.

Reporter: Thomas Warner

Oil Crash Busted Broker’s Computers and Inflicted Big Losses

Syed Shah usually buys and sells stocks and currencies through his Interactive Brokers account, but he couldn’t resist trying his hand at some oil trading on April 20, the day prices plunged below zero for the first time ever. The day trader, working from his house in a Toronto suburb, figured he couldn’t lose as he spent $2,400 snapping up crude at $3.30 a barrel, and then 50 cents. Then came what looked like the deal of a lifetime: buying 212 futures contracts on West Texas Intermediate for an astonishing penny each.

What he didn’t know was oil’s first trip into negative pricing had broken Interactive Brokers Group Inc. Its software couldn’t cope with that pesky minus sign, even though it was always technically possible — though this was an outlandish idea before the pandemic — for the crude market to go upside down. Crude was actually around negative $3.70 a barrel when Shah’s screen had it at 1 cent. Interactive Brokers never displayed a subzero price to him as oil kept diving to end the day at minus $37.63 a barrel.

At midnight, Shah got the devastating news: he owed Interactive Brokers $9 million. He’d started the day with $77,000 in his account.

“I was in shock,” the 30-year-old said in a phone interview. “I felt like everything was going to be taken from me, all my assets.”

To be clear, investors who were long those oil contracts had a brutal day, regardless of what brokerage they had their account in. What set Interactive Brokers apart, though, is that its customers were flying blind, unable to see that prices had turned negative, or in other cases locked into their investments and blocked from trading. Compounding the problem, and a big reason why Shah lost an unbelievable amount in a few hours, is that the negative numbers also blew up the model Interactive Brokers used to calculate the amount of margin — aka collateral — that customers needed to secure their accounts.

Thomas Peterffy, the chairman and founder of Interactive Brokers, says the journey into negative territory exposed bugs in the company’s software. “It’s a $113 million mistake on our part,” the 75-year-old billionaire said in an interview Wednesday. Since then, his firm revised its maximum loss estimate to $109.3 million. It’s been a moving target from the start; on April 21, Interactive Brokers figured it was down $88 million from the incident.

Customers will be made whole, Peterffy said. “We will rebate from our own funds to our customers who were locked in with a long position during the time the price was negative any losses they suffered below zero.”

That could help Shah. The day trader in Mississauga, Canada, bought his first five contracts for $3.30 each at 1:19 p.m. that historic Monday. Over the next 40 minutes or so he bought 21 more, the last for 50 cents. He tried to put an order in for a negative price, but the Interactive Brokers system rejected it, so he became more convinced that it wasn’t possible for oil to go below zero. At 2:11 p.m., he placed that dream-turned-nightmare trade at a penny.

It was only later that night that he saw on the news that oil had plunged to the never-before-seen price of negative $37.63 per barrel. What did that mean for the hundreds of contracts he’d bought? He frantically tried to contact support at the firm, but no one could help him. Then that late-night statement arrived with a loss so big it was expressed with an exponent.

The problem wasn’t confined to North America. Thousands of miles away, Interactive Brokers customer Manfred Koller ran into trouble similar to what Shah faced. Koller, who lives near Frankfurt and trades from his home computer on behalf of two friends, also didn’t realize oil prices could go negative.

He’d bought contracts for his friends on Interactive Brokers that day at $11 and between $4 and $5. Just after 2 p.m. New York time, his trading screen froze. “The price feed went black, there were no bids or offers anymore,” he said in an interview. Yet as far as he knew at this point, according to his Interactive Brokers account, he didn’t have anything to worry about as trading closed for the day.

Following the carnage, Interactive Brokers sent him notice that he owed $110,000. His friends were completely wiped out. “This is definitely not what you want to do, lose all your money in 20 minutes,” Koller said.

Besides locking up because of negative prices, a second issue concerned the amount of money Interactive Brokers required its customers to have on hand in order to trade. Known as margin, it’s a vital risk measure to ensure traders don’t lose more than they can afford. For the 212 oil contracts Shah bought for 1 cent each, the broker only required his account to have $30 of margin per contract. It was as if Interactive Brokers thought the potential loss of buying at one cent was one cent, rather than the almost unlimited downside that negative prices imply, he said.

“It seems like they didn’t know it could happen,” Shah said.

But it was known industrywide that CME Group Inc.’s benchmark oil contracts could go negative. Five days before the mayhem, the owner of the New York Mercantile Exchange, where the trading took place, sent a notice to all its clearing-member firms advising them that they could test their systems using negative prices. “Effective immediately, firms wishing to test such negative futures and/or strike prices in their systems may utilize CME’s ‘New Release’ testing environments” for crude oil, the exchange said.

Interactive Brokers got that notice, Peterffy said. But he says the firm needed more time to upgrade its trading platform.

“Five days, including the weekend, with the coronavirus going on and a complex system where we have to make many changes, was not a sufficient amount of time,” he said. “The idea we could have bugs is not, in my mind, a surprise.” He also acknowledged the error in the margin model Interactive Brokers used that day.

According to Peterffy, its customers were long 563 oil contracts on Nymex, as well as 2,448 related contracts listed at another company, Intercontinental Exchange Inc. Interactive Brokers foresees refunding $18,815 for the Nymex ones and $37,630 for ICE’s, according to a spokesman.

To give a sense of how far off the Interactive Brokers margin model was that day, similar trades to what Shah placed would have required $6,930 per trade in margin if he placed them at Intercontinental Exchange. That’s 231 times the $30 Interactive Brokers charged.

“I realized after the fact the margin for those contracts is very high and these trades should never have been processed,” he said. He didn’t sleep for three nights after getting the $9 million margin call, he said.

Peterffy accepted blame, but said there was little market liquidity after prices went negative, which could’ve prevented customers from exiting their trades anyway. He also laid responsibility on the exchanges and said the company had been in touch with the industry’s regulator, the U.S. Commodity Futures Trading Commission.

“We have called the CFTC and complained bitterly,” Peterffy said. “It appears the exchanges are going scot-free.”

Representatives of CME and Intercontinental Exchange declined to comment. A CFTC spokesman didn’t immediately return a request for comment.

The fallout for retail investors like Shah and Koller raises questions over whether they should’ve been allowed to take a position in oil contracts right before they expired, putting them in position to have to take possession of barrels of crude oil. Brokers have been grappling with how to shield clients, especially those with small accounts who are clearly incapable of taking physical delivery, since that day. Some, including INTL FCStone, have already blocked certain clients from touching the front-month oil futures contract.

Peterffy said there’s a problem with how exchanges design their contracts because the trading dries up as they near expiration. The May oil futures contract — the one that went negative — expired the day after the historic plunge, so most of the market had moved to trading the June contract, which expires May 19 and currently trades above $24 a barrel.

“That’s how it’s possible for these contracts to go absolutely crazy and close at a price that has no economic justification,” Peterffy said. “The issue is whose responsibility is this?”

By Matthew Leising, 8 May 2020

Tough times for oil companies trying to survive the pandemic

Just a few years ago the head of ExxonMobil had to appear before a Congressional committee to explain their billions of dollars in profits that some called “obscene.”

This week investors in ExxonMobil are asking why the company did not make any profit during the first quarter of 2020. Its $610 million loss is the first time that ExxonMobil reported a loss in more than 30 years.

ExxonMobil isn’t the only oil company reporting financial troubles. Actually, there are more losers than winners.

The United States Oil Fund, the largest crude exchange traded product, said recently it will sell all of its 30-day contracts to avoid a repeat of the heavy losses that occurred around the expiration of the May contract on April 20 when the price of oil bottomed out at -$37 per barrel.

Crude oil inventories continue to rise indicating the oversupply is still expanding. The Energy Information Administration reported on Wednesday inventories increased by 4.6 million barrels from 527 million barrels to 532 million barrels. It is the 14th consecutive week that inventories increased.

Oil prices on the New York Mercantile Exchange for June delivery increased early in the week to $25 but declined to $23 after inventory figures were announced. Posted price for lease sales in Texas varied from $21 in North and West Central to $14 in South Texas, according to the Texas Alliance of Energy Producers web page.

The S&P Dow Jones Indices announced last week it would “pre-roll” all June West Texas Intermediate contracts to July for all of its commodity indices given the risk of June falling to or below zero given limited storage capacity.

Even though many U.S. oil producers intend to cut their production, it takes time to work out the details. Which wells will be cut back? Can they be shut down entirely? What’s the cost? Will there be damage to the well? What problems could be encountered restarting production? What about contracts with partners, royalty owners, drilling contractors and other service providers?

The EIA reports that U.S. production has dropped since a high of 13.1 million barrels per day in February to 12.8 this week. ExxonMobil, Chevron and ConocoPhillips all say they will reduce production that will total about 1.2 million b/d this year.

Many companies that purchase crude oil at the lease from smaller independent producers have told their customers they will not purchase any oil after May 15 because storage facilities are near capacity and there is no place to store the oil.

Refinery run fell to 12.8 million b/d for the week ending April 24, which is 21 percent lower than the five-year average. Demand for gasoline and jet fuel dropped to a 30-year low and an oversupply exists. Retail gasoline prices across the U.S. averaged $1.789 per gallon last week, which is a decline of $1.108 from the same period in 2019 …

The U.S. rig count declined by 57 last week to 408. The rig count last year on May 1 was 990. The huge decline indicates that producers will have difficulty replacing reserves and production when prices rebound.

There is a light at the end of the tunnel, however. Economists expect demand for petroleum products will strengthen as economic activity increases following the easing to restrictions on travel and business activity.

Will ExxonMobil be able to survive? Time will tell. As the global economy rebounds so will the demand for petroleum products and the bottom line for oil producers in Texas and around the world.

Alex Mills, published May 9, 2020

Independent ARA Oil Product Stocks Hit 8-Month Highs

April 30, 2020 – The volume of oil products held independently in storage in the Amsterdam-Rotterdam-Antwerp (ARA) refining and trading hub rose during the past week, supported by low consumer demand, according to the latest data from consultancy Insights Global.

Overall stocks reached their highest since August 2019 during the week to yesterday, with inventories of all surveyed products rising. The increase was the highest week on week rise in percentage terms since 11 January 2018. Low consumer demand has prompted a steep contango in the forward curves of the relevant markets, making storage the most attractive course of action for many market participants. Storage tanks in the Mediterranean are likely to be full by mid-May as a result, while in the ARA area overall independent storage capacity has been filled. It now appears impossible to rent storage tanks in the area, as the outstanding has already been allocated.

Gasoil recorded its highest week-on-week rise since September 2018, gaining to reach its highest since 6 February. The arrival of three Aframax and one Suezmax tanker carrying gasoil from Saudi Arabia buoyed inventories, as did the arrival of cargoes from Russia and the US. The volume departing ARA for delivery along the river Rhine rose on the week, reflecting an increase in diesel demand from German consumers. Heating oil flows up the Rhine were also at elevated levels. Northwest European heating oil quotes reached their lowest since at least 2008 on 22 April, while the contango in the Ice gasoil forward curve made storage an attractive option.

Gasoline inventories recorded the smallest rise of any surveyed product. Small cargoes arrived in the ARA area from Finland, France, Italy, Russia, Spain and the UK. Tankers departed for Mexico, Singapore and Port Said for orders. The volume of gasoline — including blending components — arriving into the area from inland Germany reached the highest weekly total since Insights Global began recording the relevant data in 2017. High gasoline inventories inland and low consumer demand in Germany prompted refiners to transport blending components to the ARA rather than storing them locally, adding further support to ARA stocks.

Fuel oil, jet fuel and naphtha all recorded double-digit stock increases. Fuel oil inventories reached their highest since June 2018. Low demand for bunker fuels locally and high freight costs closing the arbitrage route to Asia-Pacific provided little outlet for fuel oil. And tankers arrived carrying cargoes from Italy, Russia and Spain.

Jet fuel stocks reached their highest since 5 December, with low consumer demand again making storage the only real outlet for cargoes. At least one tanker did arrive from Asia-Pacific, while one departed for the UK. Jet fuel prices in northwest Europe fell to fresh 21-year lows on 27 April on concerns over future air travel demand once restrictions have eased.

And naphtha stocks reached their highest since August 2019, again prompted by low end-user demand and a steep contango in the forward curve. The volume of naphtha leaving the ARA for destinations along the river Rhine fell on the week, pushed down by an almost total lack of buying interest from gasoline blenders.

Reporter: Thomas Warner

Fuel oil floating storage options loom in Europe

LONDON — Global fuel oil demand may be holding up better than its jet fuel and gasoline peers, but with inland storage facilities at high levels it appears only a matter of time before the economics of floating storage in Europe start to make sense for the marine fuel, according to market sources.

Shipping’s importance to the world economy — 90% of global trade is seaborne — means it has been given exemptions to keep operating through the widespread global lockdowns. However, the coronavirus pandemic has not left fuel oil demand unscathed as dry bulk, cruise ships and the container market all suffer, with inland builds of stocks in Europe and stocks spilling over on to floating storage in Singapore.

Combined stocks of fuel oil in the Amsterdam-Rotterdam-Antwerp hub decreased nearly 12% to 1.357 million mt in the seven days to Wednesday, according to data from Insights Global, but this was after reaching a 21-month high the previous week.

“Storage is pretty full, and demand is dire,” a source said, adding that buyers are pushing back delivery dates for product. The source noted however that 0.5% sulfur fuel oil demand is “a little healthier” compared to other fuel oil grades “as bunker volumes seem OK.”

“The fuel oil contango is not enough to incentivize floating storage; it works better for inland storage,” another source said. Other sources noted that the contango on 0.5% marine fuel works better than for high sulfur fuel oil, so it is being prioritized in the queue for storage.

Indeed, there appears to a global pecking order for storage related to the decimation of demand and the premium that can be commanded when they do sell, with crude, jet and gasoline all being moored offshore in considerable volumes. S&P Global Platts Analytics notes that all forward curves are all deeply in contango which is consistent with stock builds with jet, gasoline, and diesel, but the HSFO trend is similar albeit lagging.

Not all fuel oil is equal

Demand for 3.5% fuel oil after the International Maritime Organization’s stricter sulfur cap that came in to force January 1, 2020 has fallen off for the bunker pool as scrubber economics — using an exhaust cleaning system to allow vessels to continue burning high sulfur fuel — come in to question. One source noted however they were looking to store all fuel oil grades.

In the paper market, the time spread between 3.5% FOB Rotterdam barge front-month and month two was last assessed Thursday in a minus $12/mt contango, widening from minus $10.25/mt the day before.

The 0.5% FOB Rotterdam barges spread was assessed at minus $14.50/mt, steepening from minus $13.00/mt Wednesday and from minus $8.00/mt at the start of the month.

“0.5% marine fuel has a better contango, I am not surprised that more people are positioning themselves to store that,” one fuel oil source said.

Storage running out

As a result of limited storage capacity, European bunker premiums — the delivered market compared to the respective barge prices — have come under pressure recently, falling steadily since February. So far in April the premium has averaged $8.94/mt, down from a March average of $19.41/mt and off sharply from the February average of $26.24/mt.

One bunker source noted a decline in bunker premiums last week, particularly for Mediterranean marine gasoil, adding that this could be a result of needing to free up space for more product coming in.

The markets are keeping an eye on storage fundamentals, and not ruling floating storage out as it remains the only option after inland storage becomes saturated, which participants may be pushed to do so despite being uneconomic in the near future.

“Availability and prices of vessels will rally, so there will be less vessels and those that are left would be more expensive,” a source said.

“Some are starting to look at floating storage,” another source said, adding that they wouldn’t be surprised if some started to store on vessels.

Platts Analytics sees inland storage running out by June, with total storage afloat potentially increasing by 250 million barrels.

Fuel oil won’t have long to jump aboard those ships and the move to store fuel oil on the water in Europe may not be far away.

Editor Alisdair Bowles from Platts