It was only a matter of time, really. With demand decimated by the coronavirus and Saudi Arabia on the oil warpath, the imbalance between oil supply and demand deepened dramatically, raising the question of what happens when the world’s oil tanks and tankers fill up.
The answer? Nothing good.
Earlier this month, oil data analytics firm OilX warned that oil in
storage around the world could reach 1 billion barrels before long. This
week, Reuters quoted shipping industry sources as saying that as much
as 80 million barrels of oil are hanging out in floating storage. OilX
has calculated that this oil in floating storage could be even more, at
some 100 million barrels.
And the number is only going to grow.
Earlier this week, Bloomberg quoted three sources from the Energy
Department as saying the department was discussing whether to start
renting out federal storage space to local oil producers as their tanks
were filling up and there were no quick buyers for the oil they pump.
Earlier this month, Forbes’ Gaurav Sharma reported that shipping
rates for Very Large Crude Carriers (VLCCs) had soared by an insane rate
of 678 percent in just one month–to $175,000 a day–to ship crude from
the Middle East to Asia. A rate increase this large suggests a massive
increase in demand for VLCCs. What’s more, this demand for VLCCs does
not coincide with a proportional increase in demand for crude. Traders
are hoarding oil.
Reuters’ Jonathan Saul notes in his report on storage that the last
time there was so much oil in floating storage was in 2009, after the
Great Recession. At the time, oil in floating storage reached 100
million barrels. This time it’s anyone’s guess how much oil traders and
others would accumulate in storage before the demand situation improves.
If forecasts coming in from investment banks and the IEA are any
indication, it will be a while before all those barrels are sold.
Goldman Sachs, for one, told CNBC that some grades are already
trading below zero because of the devastation the Covid-19 pandemic has
inflicted on oil demand.
“Indeed, given the cost of shutting down a well, a producer would
be willing to pay someone to dispose of a barrel, implying negative
pricing in landlocked areas,” the bank said.
“With demand collapsing but supply rising after OPEC and
non-affiliated Russia failed to reach a production cut agreement in
early March, global inventories could reach their maximum capacity
within weeks,” analysts from Eurasia Group told CNBC, adding
“Already, ports and refiners are turning away oil tankers. This will put
even more downward pressure on prices and pose an existential threat to
many companies.”
The group of doomsayers is large and growing. There is virtually no
optimistic scenario about oil demand right now, just a couple of months
after the IEA and the EIA predicted continued growth for U.S. shale
output to over 13 million bpd, and investment banks forecast stable oil
prices. But two months ago, the coronavirus outbreak had not yet become a
pandemic. The situation is, according to many, unprecedented, which
means the industry and all other stakeholders are navigating a terra
incognita.
The answer: whoever wants to survive the crisis without too much pain.
IM SCARD PLS DONT LET US RUN OUT OF OIL
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