A storm of epic proportions is gathering in the oil market where storages are brimming and top producers test the limit of self-immolation in a senseless price war, while consumers hunker down at home over a dangerous pandemic, setting the stage for an arduous April.
According to a study by Rystad Energy, a Norwegian independent energy research and business intelligence company, the largest oil supply surplus the world has ever seen in a single quarter is about to hit the global market from April, creating an imbalance of around 10 million barrels per day (bpd).
The firm’s research analysis shows that global storage infrastructure is in trouble and will be unable to take more crude and products in just a few months.
“Our current liquid balances show supply surpassing oil demand by an average of nearly 6 million bpd in 2020, resulting in an accumulated implied storage build of 2.0 billion barrels this year,” Rystad Energy said.
“Based on our rigorous analysis, we find that the world currently has around 7.2 billion barrels crude and products in storage, including 1.3 billion to 1.4 billion barrels currently onboard oil tankers at sea. We estimate that, on average, 76 percent of the world’s oil storage capacity is already full,” it said.
There is essentially no idle storage capacity available on tankers, as Saudi Arabia and other producers might have already wiped out the available population of Very Large Crude Carriers (VLCC) for March and April 2020, the company said.
The current rate of output, according to the company’s research, shows that using an estimated average 6.0 million bpd of implied oil stock builds for 2020, in theory it should take nine months to fill all onshore tanks, now they expect them to fill up within a few months.
So not only would the world have outsized oil production with some of the lowest demand it has seen in decades, it won’t even have where to store them.
“The current average filling rates indicated by our balances are unsustainable. At the current storage filling rate, prices are destined to follow the same fate as they did in 1998, when Brent fell to an all-time low of less than $10 per barrel,” said Paola Rodriguez-Masiu, Rystad Energy’s senior oil markets analyst.
But this reality has done little to assuage Saudi Arabia and Russia who have squared off in a price war that is fast looking more like a contest of bloated egos than reasoned response to a failing trade deal.
Worse still, other OPEC members, including Nigeria, have kowtowed to Saudi Arabia’s unhelpful stance even though their economies stand to suffer the most from the action.
Saudi Arabia has said it would ramp daily production to a record 12.3 million barrels per day in April as against the roughly 9.7 million bpd it pumped in February. Russia also said it would raise output by over 300,000 barrels per day, and other producers have said they could increase output too.
“With each day there seems to be yet another trapdoor lying beneath oil prices, and we expect to see prices continue to roil until a cost equilibrium is reached and production is shut in,” said Louise Dickson, Rystad Energy analyst.
“This is the most dismal oil demand picture we have witnessed in a long time with a simultaneous collapse in jet fuel, gasoline, shipping fuel, petrochemicals, and oil used for power generation,” Dickson said.
OPEC has made overtures to the Texas Railroad Commission, the commission that represents Texas’ oil production, to agree on a pact that will slash at least 10 percent of their production for a start but US regulators and drillers have balked at the idea.
“We find that liquid supply will have to be reduced by around 3.0 million to 4.0 million bpd compared to the current production planning to bring the implied stocks builds closer to 2.0 million to 3.0 million bpd for 2020, which is the level of implied stocks build that we find sustainable in the short to medium term,“ Rodriguez-Masiu said.
Oil producers continue their puerile price war amidst collapsing oil demand. Some oil traders told Bloomberg that demand is falling by 10 to 20 million barrels a day, or a fifth of global consumption, as millions find themselves in lockdown or self-isolation, causing travel to grind to a halt.
Since dropping below $25 a barrel last week, an 18-year low, Brent crude has fallen to levels last seen nearly two decades ago. On four occasions in the past two weeks, Brent posted daily price swings of more than 10 percent, according to a Bloomberg data.
Analysts say even if demand recovers to normal levels by the middle of the year, 2020 is still on course to suffer the biggest decline in oil consumption since reliable records started in the mid-1960s. Until now, the biggest annual contraction was recorded in 1980, when it tumbled by 2.6 million barrels a day as the global economy reeled under the impact of the second oil crisis.
Yet with the rampaging coronavirus still haunting the global economy, specific rate of drop in demand is a moving target for many countries. Italy is on lockdown, as well as the United States and many European countries including Spain and Germany and these countries use huge volumes of oil.
Some oil producers, including Nigeria, will rue their inability to diversify their economies away from oil as their earnings are about to see massive deterioration between April and May on account of depressed crude oil prices.