After having crashed nearly 70 percent in the first three months of 2020, benchmark WTI prices are trying to form a bottom around $20 per barrel.
But this psychological threshold is looking increasingly shaky as global crude storage facilities are filling up at an unprecedented pace. OPEC and its partners officially ended their output cut deal today, following the words of Russian Energy Minister Novak that every producer is ‘’free to pump at will’’.
With a flood of physical crude set to hit the market, it will take weeks, not months, for global oil storage space to run out. The storage problem could grow even worse as refining capacity is coming offline due to coronavirus health risks and in some cases a (very) negative crack spread caused by a double whammy of low fuel demand and crude oversupply.
Oilprice.com’s Alex Kimani wrote on Saturday that refining crack spreads are now negative in both US and Asian markets. This means that refiners must pay for every barrel they refine into fuel, which will inevitably lead to even lower demand for crude feedstock.
March has been a horrible month for oil producers, but April could get even worse. Related: An Oilman’s Plea To President Trump
The gap between supply and demand in oil markets is expected to grow increasingly pronounced this month. Trading giant Trafigura’s chief economist now expects demand for crude to fall by 30 million bpd in April as around 3 billion people remain under lockdown worldwide.
In the meantime, OPEC producers Saudi Arabia and the UAE are preparing to flood European and Asian markets with crude. Bloomberg reported that the Kingdom’s supply has now officially surpassed the 12 million bpd mark, compared to 9.7 million bpd. While some analysts remain doubtful that the kingdom is able to produce anywhere close to 12 million bpd, Riyadh is already resorting to drawing crude from its inventories to boost exports, and Saudi authorities have instructed Aramco to ramp up supply to 13 million bpd.
Saudi Arabia’s ally the UAE has also vowed to increase production. State-owned ADNOC said on March 11 that it was looking to increase production to 4 million bpd, one million barrels per day higher than it produced under the OPEC+ output deal.
To make matters worse, Iraq said on Tuesday that it would raise production by 200,000 bpd to 4.8 million bpd according to Bloomberg.
It seems then that Riyadh is defying pressure from Washington and Moscow to halt its production surge. Thus far, the Trump Administration hasn’t taken any serious action to force the Saudis to stop the oil price war, but according to Reuters, ‘’U.S. President Donald Trump said on Tuesday he would join Saudi Arabia and Russia, if need be, for talks about the fall in oil prices’’ Related: Oil Markets Are On The Brink Of Armageddon
The question then is whether the Saudis will be successful in their high-risk gamble for market share. Before starting the oil war, Riyadh surely anticipated that the extra barrels it would free up for exports would sell at a steep discount to Russian and US crude grades, but what it didn’t expect is that there may not be any demand for its additional crude as refiners simply can’t handle any more feedstock (and probably won’t be able to store it either).
Bloomberg’s Ellen Wald says that the current Saudi strategy could come at a huge cost for the kingdom, ‘’Leftover, unsold oil sitting in tankers off the coast of Saudi Arabia will make the kingdom look weak. Aramco and the kingdom would face severe revenue drops…undermining the overall economy and the monarchy’s political dominance’’.
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Whether or not the Saudis manage to capture market share, U.S. producers are set to lose the most. Oil prices in many states have fallen into the teens and in some states we are already seeing oil selling for $1 per barrel, causing producers to shut-in a huge number of wells as demand for their crude is slowly drying up.
By Tom Kool of Oilprice.com
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- The U.S. Is About To Lose Its Place As The World’s Largest Oil Producer
- The Inevitable Collapse Of Global Oil Production
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While the US economy can survive the demise of the US shale industry, Saudi Arabia’s economy would be dead by then and the country on the verge of dismemberment. However, I don’t believe we will see $1 oil because if we reach that stage, the world will be thinking of mass starvation, total bankruptcy of the global economy and a collapse of law and order rather thinking about the price of oil or about US shale oil’s survival or demise.
Saudi Arabia doesn’t have the production capacity to flood the global oil market with oil in early May by raising its exports from the current 7 million barrels a day (mbd) to 10.6 mbd. To raise its oil exports to 10.6 mbd, Saudi Arabia must produce 13.00 mbd including 3.7 mbd for domestic consumption. But Saudi Arabia has never ever had such a production capacity and will never ever achieve one. So the talk about raising its exports to 10.6 mbd is a farce. Saudi Arabia can at best produce some 8.0-9.0 mbd with another 700,000 b/d to 1.0 mbd coming from storage. This is so because its current production comes from five giant but aging and fast-depleting oilfields discovered more than 70 years ago.
Moreover, what advantage does Saudi Arabia get from flooding an oil market already sagging under the weight of a glut estimated at 1.8 billion barrels and a global oil demand declining by an estimated by 20.0 mbd.
As for the US shale oil industry, it may stay alive slightly longer on a life support machine provided by the Trump administration. It will never be allowed to die because of its economic and strategic importance to the United States.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London