The price for West Texas Intermediate (WTI) May futures fell by more than 40 per cent on Monday, crashing to less than $11 per barrel. While the experts suggest that the slump could have been provoked in part by expiring May futures contracts, the ongoing coronavirus pandemic and plunging oil demand have been driving the challenges the world and the US oil industry in particular are currently facing, and they cannot be overcome that easily.
“The main characteristics of the US markets are now working against it”, says Dr Cyril Widdershoven, a global energy market expert and advisor at several international think tanks. He argues that the lack of available storage capacity and the absence of necessary transport infrastructure to bring crude oil, and especially shale oil, from American producing regions to the market create a very “bleak” outlook in relation to how the story with liquid gold will unfold in the future.
“Looking at the current pressure on the US oil markets, the potential that price levels will go further down, even hitting $10 per barrel is not outlandish”, Widdershoven suggests.
Widdershoven believes that the absence of "real access” to storage in the US will make negative prices a midterm reality, as not only oil production in general but also many small shale oil producers will also soon be forced to shut down. US shale oil companies, which produce around 7.7 million barrels per day, according to 2019 estimates, cannot afford to rent storage facilities on the mainland or offshore, as large corporations do, and even have to resort to putting their output into artificial lakes, an environmentally risky move. However, the analyst notes, it is difficult to force US companies to lower their production as court cases would follow.
“Demand destruction will force shutdowns, first and foremost in the weaker producer regions, such as US shale, Canada oilsands, North Sea and several FSU and African oil producing regions”, Widdershoven says.
According to the expert, the low demand for oil worldwide signals that the oil market could run out of storage capacity by May, with only several Strategic Petroleum Reserve (SPRs) in OECD countries still available for use. He argues that there is no better solution right now as to cut production to 25-30 million barrels per day would far exceed the 10% per day cut recently agreed by OPEC+.
This is echoed by Virendra Chauhan, a senior analyst at industry consultant Energy Aspects, who argues that one billion barrels of oil “must be destocked” before prices can go up again.
“Even in the best-case scenario of a demand recovery, refiners will struggle with jet containment for months as the recovery in jet will take time”, the analyst suggests, arguing that some fields may never recover from this crisis.
Last week, Saudi Arabia, Russia and other petroleum-exporting nations agreed to cut their oil production by 9.7 million barrels per day through June, in an attempt to ease the market glut. However, some oil markers still continued to nosedive, with Brent loosing almost 6% of its value on Monday and WTI dropping to a 34-year low, amid prices last seen in 1986.
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