Oil Markets: Reeling Under Twin Effects

When 2019 came to an end, one market that was smiling amidst the chaos was the oil market. However, as the first quarter of 2020 draws to a close, the scenario has changed dramatically as the global village enters into a lockdown due to the global pandemic. Subsequently, the oil markets have taken a beating owing to sinking demand levels and the glut in supply equations. In retrospect, crude oil had stepped into 2020 with a value of $61.45 per barrel. The prices have since slumped and reached the lowest price of $20.04 per barrel on March 18. Another factor attributing to the lowering of the rate is the price war launched by Saudi Arabia against its once ally Russia. The unfortunate turn of events was played out in early March as the global markets were already in panic due to the novel corona virus outbreak.

With the supply already in overdrive, the world surplus could attain 20 million barrels per day (mbd) in the next couple of weeks. The rippling effects could threaten not only the storage capacities everywhere but could also crash prices further and eventually shut oil production. The developments in the past few weeks in the US and the policy response to it have implied that the fall in US demand could be as high as 7 mbd in the worst month according to an analyst associated with Standard Chartered.

The weakening of the situation in the US is throwing forecasts out of the window. In a recent forecast on March 17, Standard Chartered had estimated a global surplus of 13.4 mbd in April but now the surplus could exceed 20 mbd. The staggering revisit to the forecasts could signal that storage capacity could fill up by the end of the year. However, the short-run effects remain the same: prices are likely to fall further and the higher-cost supply will need to be closed down.

Market analysts have opined that the following three could be most vulnerable in the current situation: Canadian oil sands, the North Sea and the Latin American group. With further supply reductions coming from the US Shale when completions are no longer able to offset the decline, the aforementioned parties would be the most affected due to the sustained period of lower prices. In official estimates, the oil storage levels across the global storage facilities have climbed to about three-quarters full on an average since the January shutdown of major refineries in China to curtail the outbreak of the virus.

Canada may also be days away from running out of stock for its domestic oil production as per reputed analysts; and the rest of the world may follow suit in the upcoming months. Analysts expect that oil-rich regions in West Canada will require to rein in production by approx. 400,000 barrels of oil a day by the end of March.

Many experts believe that the global oil industry may look to offshore oil tankers to store their extra crude oil but for this to be a viable and economic solution, prices would have to fall further. The quest for affordable oil storage will be even more difficult after Saudi Arabia’s ‘vessel booking spree’ which has pushed freight rates higher.

The global oversupply of oil is expected to surge further in April when an agreement between the OPEC oil cartel and Russia to limit oil production is due to end. With the end of the deal, Saudi Arabia will be able to compete in the race with Russia to grab a greater share of the market in terms of oil production. Market pundits have estimated that the world has about 7.2 billion barrels of crude and products in storage, including 1.3 to 1.4 billion barrels onboard oil tankers at sea. In theory, it would take an estimated nine months to fill the remaining oil storage stores. But due to numerous constraints, the numbers will shorten this window to only a few months.

In hindsight, the oil industry is expected to continue filling its oil storages with crude in the months ahead as the pandemic’s economic contagion spreads to the rest of the world, limiting demand for the numerous natural resources including oil. Crude oil falling to $10 per barrel – a plausible possibility – given the state of affairs in the world today.

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Vivek Risal

Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]

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