It was going to be a pretty good year for oil. OPEC + would continue to limit production to keep prices above dangerous levels, and the American shale would continue to grow. But a series of events – some predictable and some less predictable would change the trajectory of the world oil market.
Russia has abandoned the cuts. The coronavirus epidemic that had paralyzed China said it had bigger plans, those that involved the entire planet. The result: what started as a reasonably good year has turned into a nightmare.
The oil industry is shaken by this nightmare, but unfortunately, there is no alarm clock. Oil producers sell crude oil at a discount, even at current depressed benchmarks, desperate to find buyers, says Bloomberg news report. Price pain is universal, stretching from Russia to Alaska and from Europe to Australia.
At the same time, oil storage tanks around the world are filling up, raising fears that we will soon reach capacity. When this happens, current prices seem high in comparison. There is also an imminent shortage of tankers, as traders charter VLCCs to store crude oil abroad. The icing on the cake of this oil horror cake is the uncertainty surrounding a global production reduction agreement.
Someone should definitely make a film about it.
Bloomberg reported this week, citing unidentified traders, that the Russian Sokol blend was selling for about $ 8 a barrel compared to the benchmark Dubai index, which negotiated at around $ 33-34 Monday and Tuesday. That, according to the report, was $ 11 a barrel less than the last Sokol deal. Worse, the Australian Varanus, traders said, was trading at a discount of $ 13-14 a barrel compared to the dated Brent, which this week fell to around $ 30 a barrel. This is a 50% bonus to Brent for the last Varanus freighter.
The sheds tell a dark story: there is a lot of oil and few buyers. It’s a story that has become quite familiar over the past few weeks. The coronavirus epidemic has paralyzed demand – first in Asia, then in Europe, North America and everywhere else, people are advised to stay at home to prevent the spread of the disease. Thus, all the oil which cannot be sold, at a reduced price or not, is sent to storage.
Related: Global Oil Producers Agree On Joint Production Reduction Of 10 Million B / D
Earlier this year, data analytics company OilX calculated that there were about 650 million barrels of crude stored on shore and an additional 100 million barrels in offshore tankers.
But it was in mid-March. Since then, demand has reportedly declined further due to blockages, increased strandings and travel restrictions.
Now, another analytics company, Signal, which focuses on the shipping industry, has calculated that up to 440 very large crude carriers may be required for floating storage, which means that they would not be available for normal operations. This monstrous number of VLCCs would be needed in the event of Black Swan oil, according to Signal analysts. Such an event would lead to an overproduction of oil 20% greater than demand, which would require 880 million barrels of storage space.
The firm also performed calculations for low and medium case scenarios, in which oil production would exceed demand by 10% and 15%, respectively. In the low scenario, there would be some 115 million barrels to be stored, which would mean 57.5 VLCC. In the intermediate scenario, the additional barrels requiring storage would be 497 million, which would require 249 VLCC.
Right now, the world is in the low case scenario, according to Signal. This is good news given the reports of the filling of terrestrial reservoirs, with at least one major hub – Saldanha Bay in South Africa—almost full now. Space literally runs out.
The situation could go from a low scenario to a medium scenario if OPEC and the rest of the oil world cannot agree on an agreement. It will be a different agreement: this time everyone will have to cut, which could make it more difficult to reach a quota agreement. On the other hand, everyone is suffering now, which could make it easier to reach an agreement.
The problem is that even a global agreement may not be enough for the physical market. A deal could support prices, but it won’t magically revive demand, which the latest reports, may have already dropped 30% or 30 million bpd. Reductions totaling 10 million b / d were discussed, with President Trump mentioning a range of 10 to 15 million b / d. But it’s just talking.
There is however a glimmer of light on the horizon. China is temporarily returning to normal. Refiners who were to reduce their execution rates considerably during lockdown are again buy oil. It is far too early to say how long China’s full recovery will take, but the renewed interest from Chinese buyers in oil certainly suggests that the nightmare will end in the long run.
By Irina Slav for Oilprice.com
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