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Oil prices set to plunge further as glut looms

Dubai - Oil industry on brink of catastrophe as fear of US recession sends crude prices to lowest level since 2002

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Oil markets are heading into a period of a severe supply-demand imbalance in the second quarter of 2020 with prices projected to plummet by $10 a barrel for both Brent and WTI in April in the wake of severe demand destruction caused by the Covid-19 pandemic and a price war sparked by producers, analysts said on Sunday.
The acute oversupply coupled with demand loss amid bleak prospects of a global recession threatens to test the limits of crude and product storage as soon as May, according to S&P Global Platts Analytics.
Lowering its West Texas Intermediate and Brent crude oil price assumptions for 2020 by $10 a barrel to $25 and $30, respectively, S&P Global Ratings said the growing number of lockdowns could result in an oil demand decline of as much as 14 million bpd during April and May.
"Adding this to the additional supply of two million to four million bpd from Opec+ implies a swing to an imbalanced position equal to 15 per cent or more of global production," it said.
In the short run, the oil market surplus could reach a peak of 13.7 million bpd in April, with an average surplus of 12.9 million bpd for the second quarter, Standard Chartered said.
"The oil industry is on the brink of catastrophe as fear of a US recession sends oil prices to their lowest level since 2002," the bank said. WTI tanked by a staggering 19.2 per cent to $22. Brent and Mexican Basket are down 9.7 per cent and 22.4 per cent, respectively.
S&P Global Platts Analytics said in the event of a market share grab, "we believe Russia has a break-even oil price of approximately $51 per barrel, although Saudi Arabia has a much higher price of $82 per barrel and is in the midst of an economic transformation [Vision 2030] to reduce its reliance on oil. Also, Russia, Saudi Arabia and several GCC nations have significant financial resources and can sustain a low oil price environment for some time."
While April may see the worst of oil demand destruction, Standard Chartered says year-on-year demand could fall by 8.8 million bpd in May and 7.4 million bpd in June. And even after the pandemic passes, there will be an "element of persistent demand loss. driven by permanent changes in air travel behaviour and the demand implications of businesses unable to recover from the initial shock".
Analysts said oil prices crashed to multi-decade lows and could fall even further in a nightmare scenario for producers who are facing their worst crisis in history, but the market is not at a bottom yet.
The millions of barrels of additional supply promised by Saudi Arabia will take time to reach their destination. On the demand side, major economies have only begun to slow down, and the gaping hole where the economy once stood is expected to widen.

"Even just a week ago, it was difficult to imagine how oil market conditions could become significantly weaker," Standard Chartered said. "However, over the past week the restrictions placed on mobility by European and North American governments as part of their coronavirus response have significantly magnified the negative demand shock."

The bank said the inventory buildup could reach a gargantuan 2.1 billion barrels by the end of the year, "stretching the midstream of the industry to its limits," the bank wrote. That figure represents an upward revision of 50 per cent from the 1.4-billion-barrel inventory surplus the bank predicted. just a week ago.

According to Paul Sankey, managing director of Mizuho Securities, oil prices can go negative due to the coronavirus pandemic.

He argues that global oil demand is only around 100 million bpd, but the economic fallout from the coronavirus pandemic could crash demand by up to 20 per cent. This would create a 20 million barrel-per-day surplus of oil in the market that would rapidly exceed storage capacity, forcing oil producers to pay customers to buy the commodity.

The Trump administration is taking advantage of the low oil prices to fill up its strategic reserves in Louisiana and Texas while supporting American shale producers in this tough time. The American government plans to purchase a total of 77 million barrels of oil starting within weeks. But according to Sankey, this can only be done at a rate of two million per day.

The Mizuho analyst argues that the US strategic reserve only has four months until it hits capacity. And he believes oil prices will go negative after it fills up.

Other analysts have even more dramatic scenarios. Eurasia Group says demand could fall by as much as 25 million bpd in the next few weeks and months. The historic glut means that the world could run out of storage space. "The combination of weakening demand and excess supply is hardly going to be accommodated by onshore storage," Giovanni Serio, head of analysis at Vitol, said.

The downturn could lead to more than 200 bankruptcies just in the European oilfield services sector, according to Rystad Energy, or 20 per cent of total firms in the sector.

Goldman Sachs said WTI could fall to shut-in price levels at between $23 and $26 per barrel, and in fact, the bank cut its predicted second quarter price for Brent to $20 per barrel, down from $30 previously.
- issacjohn@khaleejtimes.com