Plunging demand, surging supply, and strained storage capacity have put so much downward pressure on oil prices that producers are now considering shutting-in oil wells. The magnitude of these en mass shut-ins could be the largest since the mid-1980s, Bloomberg’s Javier Blas writes.
It was in 1985-1986 when OPEC’s de facto leader and largest producer, Saudi Arabia, abandoned production restraint to regain market share, roiling oil markets in the process.
In an eerie semblance to events from 35 years ago, the Saudis dusted off the old ‘bankrupt-them-all’ playbook earlier this month after Russia refused to back deeper OPEC+ production cuts. The Kingdom is intent on flooding the market with oil as of this week, and it seems it is not backing down from the oil price war.
If the market had to process just the supply surge after the collapse of the OPEC+ coalition, it could have digested it in months with prices settling lower.
However, the supply surge is now combined with colossal demand destruction all around the world as major economies restrict travel to contain the spread of the coronavirus pandemic. It’s anyone’s guess how much demand will be lost in the coming weeks and months, and estimates are now close to 20 million barrels per day (bpd) of oil demand wiped out in April—this would be a 20-percent plunge in the typical 100-million-bpd global oil demand.
The double shock has sent oil prices tumbling to the lowest in years, with WTI Crude trading at $20 a barrel early on Monday.
WTI Crude may still cling to the $20 mark, but many regional grades, including in the United States, are trading in the teens and even in the single digits. Prices in some basins are so low that not only aren’t producers making any money, but they could soon resort to shutting in wells—despite associated costs—because even shut-in costs would be lower than the costs to pay to produce barrels of oil worth a dollar or two.
Related: Russia’s Plan To Bankrupt U.S. Shale Could Send Oil To $60
With the world running out of storage and producers having unequal access to storage sites or tanks, producers of crude grades in landlocked areas may soon see themselves paying consumers to take their oil away. Faced with negative prices, many would resort to shut-ins, analysts say.
In some areas in the United States, crudes are already in the single digits, and even negative. Oil trader Mercuria has recently bid -$0.19 for a barrel of Wyoming Asphalt Sour, a heavy, dense crude for making bitumen, Bloomberg reported last week. In front-month futures, Wyoming General Sour traded at the end of last week at $5.75 per barrel, Oklahoma Sour was priced at $6.00, while in North Dakota, Williston Sour traded at $5.89 a barrel.
The U.S. shale patch is quickly responding to the crashing oil prices—the number of oil and gas rigs dropped by 44 last week—the largest single-week drop since February 2016.
The double supply-demand shock will likely lead to an unprecedented global inventory build, which “would overwhelm available storage capacity globally by the middle of the second quarter,” Roger Diwan, vice president, financial services at IHS Markit, said in a statement last week.
“Some sort of management or partial management is likely to emerge as paralysis spreads across the sector, but lower prices and shut-ins are likely to occur first,” according to Diwan.
Shut-ins are complex and are not expected to take place overnight, IHS Markit says. Yet, producers whose losses from pumping oil exceed shutdown costs and those without physical storage or takeaway capacity in the form of pipeline, rail, truck, or tanker, will be forced to shut in production, IHS Markit noted.
The gap between supply and demand will be so large that the surplus will outrun available global storage capacity, the consultancy said.
“This means, owing to lack of storage, that more production will be cut or shut in than previously anticipated,” IHS Markit noted.
“Production is going to have to be reduced or even shut in. It is now a matter of where and by how much,” said Jim Burkhard, vice president and head of oil markets, IHS Markit.
According to IHS Markit estimates, globally, the countries/regions with the lowest capacity – estimated in how many days of crude oil production could be placed in available storage – are Nigeria, Brazil, Ecuador, and Alberta in Canada. The U.S. PADD 4 Rocky Mountain district, which includes Wyoming and Colorado, has 12.8 days of storage capacity, while all U.S. districts combined have 30.2 days of storage. Russia’s days of storage are 8.0, while Saudi Arabia’s are estimated at 18.0.
While demand plunges and supply surges, market analysts will be watching how large the shut-ins could become during this oil price crash.