With the physical oil market coming apart at the seams, traders have begun to realize that we are a lot closer to full storage capacity than previously thought.
As a result, WTI crude prices for the May 20 contract continue to swing between negative and positive territory and Brent crude has taken a significant hit on Tuesday morning.
With the storage crisis taking its toll on prices, producers have started shutting in production, with Canada, Iraq, and Venezuela taking the lead in what Rystad Energy predicts will be a 2 million bpd wave of shut-ins.
One of the first victims of the oil price crash, as Oilprice.com reported yesterday, were the landlocked Canadian producers who have seen prices for their heavy crude fall far into negative territory. The scale and pricing structure of their products mean that they can usually afford to produce for quite a while in a very low oil price environment, but negative oil prices have forced companies such as ConocoPhillips, Suncor, Husky Energy, Cenovus and Murphy oil to shut-in production as the added cost of blending the bitumen with ultra-light oil makes the operation 100 percent un-economical.
According to Rystad Energy, total shut-ins in the Canadian oil patch could amount to 960,000 bpd in Q2 2020, with the total amount of shut-ins in April reaching some 1.14 million bpd.
After Canada, Venezuela, Iraq, Brazil, Libya, Ecuador and even the U.S. are seeing forced shut-ins due to storage constraints, COVID-19 and low prices.
Libya, as a result of a continuing blockade, saw its oil production fall to just 80,510 bpd last week as Khalifa Haftar’s forces continue to block export facilities. The North African country has seen its oil output fall from 1.2 million bpd before the blockade, and the head of its National Oil Corporation warned that production could fall to zero if the blockade continues.
In the meantime, Iraq has shut-in production at its Garraf and Halfayah fields, leading to a total production reduction of almost 300,000 bpd in May as operators are withdrawing staff in a bid to protect them from the spreading coronavirus in the country. Related: Oil Prices Hit $15 For The First Time In 21 Years
In South America, crisis-stricken Venezuela is also struggling to find a place for its crude as storage capacity is running out. Caracas claims it produced around 670,000 bpd in March, the lowest level in five months, but production at the end of that month came down to just over 460,000 bpd as output at the country’s JV projects was reported to be falling due to the coronavirus measures of the government.
Venezuela’s production could be set for an even bigger hit in April as the nation struggles to find buyers for tens of millions of barrels of its crude amid the global demand crunch.
Brazil, which was on course to boost offshore production in its pre-salt fields has also cut back. Petrobras, Brazil's state-owned oil producer has committed to a 200,000 bpd cut, but has already decided to shut-in production to the tune of 128,000 bpd according to Rystad’s calculations.
Lastly, Ecuador, one of the South-American countries that is suffering the most from the coronavirus pandemic saw its production fall from 512,000 bpd to just 68,000 bpd this month as a double pipeline rupture caused by mudslides led to a production drop of 450,000 bpd forcing the country to declare a force majeure on exports.
U.S. producers have also started to shut in production, with North Dakota reporting a production reduction of around 260,000 bpd at the beginning of the month. Further output cuts in the Bakken, Niobrara, and the Permian are no-doubt expected to follow, but they could take more time than expected, even as oil prices turn negative. Goldman Sachs’ Jeffrey Currie warns that shutting in production is not a simple matter.
In an interview with CNBC on Tuesday morning, he states that "Shutting down a well is extremely expensive, and sometimes you damage the well forever," he told CNBC, adding that, "We don't think this is the end of it. You're likely to see this continue to go on at least through the middle of May." Related: Saudi Arabia Slashes Asian Oil Exports By 2 Million Bpd
The question then is, will these shut-ins and outages in combination with a 10 million bpd OPEC+ output cut be enough to balance the battered oil markets? The answer is ‘probably not’.
Output cuts and shut-ins may bring the market a bit closer to balance, but the industry won’t fully recover until demand picks up again.
Most European nations plus the U.S. are slowly moving towards ending lockdowns and reopening their economies, but several analysts have warned that markets may not see a rapid bounce in crude demand. According to Bjarne Schieldrop, chief commodities analyst at SEB, there is a “high risk” that the optimism surrounding a V-shaped recovery will be dashed in the next two months as countries are like to move to a ‘semi-lockdown’ situation as the risk of another major outbreak loom.
Global producers won’t have a choice, pump at a loss or shut-in production.
By Tom Kool of Oilprice.com
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