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.
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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.
Global oil storage capacity has an upper usability limit of 1.2 billion barrels, according to IHS Markit data cited by Forbes' Sharma. In order to avoid filling tanks and tankers to the brim, producers would have to cut production, and according to IHS Markit, the cut would need to be about 10 million bpd. It looks like this cut would need to come soon to avoid a collapse in benchmark prices into single-digit territory. Of course, a question arises here: who will agree to cut so much production?
The answer: whoever wants to survive the crisis without too much pain.
By Irina Slav for Oilprice.com
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