International benchmark Brent crude fell to $25 a barrel last week, after starting out the year at more than $65. Amid the ongoing historic meltdown in the global oil industry, characterized by a supply crisis and an unprecedented demand event, there are indications prices may plunge to $10 a barrel or even below in the next few months.
Presently, oil remains stuck below $30, a crash triggered by dented demand for energy globally as countries and industries shut down after the coronavirus outbreak, coupled with the oil price war between top exporters Saudi Arabia and Russia. In response, majors have announced significant reductions to spending for the rest of the year with capital expenditures already 45 percent below 2019 levels. But another round of deeper spending cuts by oil companies is already beginning, American investment bank Goldman Sachs says.
As the wave of oil industry spending cuts continues, Rystad Energy said this week explorers and producers are likely to trim project sanctioning by up to $131 billion, or about 68 percent year-on-year. “Upstream players will have to take a close look at their cost levels and investment plans to counter the financial impact of lower prices and demand,” the Oslo-based firm said Monday.
Usually, major oil companies are more protected during downturns than small and medium-sized explorers as they have downstream operations – refining and petrochemicals – that benefit when oil prices fall. For instance, refineries typically spend less money to buy crude oil when prices crash, which ultimately results in more sales of refined products.
But with the coronavirus outbreak ‘accelerating’ according to WHO, global demand for energy is expected to fall further with estimates suggesting the pandemic could cut oil consumption by 10 million barrels per day or more. “It doesn’t matter how cheap crude is if people are not driving, flying or consuming anything aside from the bare essentials, there is no demand boost from low prices,” Nick Cunningham writes on Oilprice.
Heading into April, that expected plunge in demand could see oil prices fall to historically low levels. And according to analysts, prices have more room to fall as producers are on the brink of running out of storage capacity. Canada particularly may be days away from having no more store for its domestic oil production, analysts at Rystad Energy said, adding that the rest of the world may find themselves in the same situation in a few months.
In spite of the downward review in spending, drilling, and output, poor demand over the past couple of months has filled up storage tanks. Since the January shutdown of major refineries in China to curb the coronavirus outbreak, oil storage levels across global storage facilities have surged to about three-quarters full on average, reports say.
Exxon, for instance, this week said it was cutting production at its Baton Rouge refinery, the company’s second-largest in the United States because it was running out of storage. Other refineries are making similar moves by reducing processing as the world runs out of storage space.
“[N]o one can exactly be sure that production will be shut-in fast enough to not overwhelm our ability to store oil,” energy research centre JBC Energy said. “In such an environment, it is as possible for Brent prices to briefly go to $10 per barrel as it was back in 1986 or 1998.” Credit rating agency Standards & Poor has also warned that oil prices may fall to $10 a barrel this year.
Compounding the situation is the fact that an agreement between OPEC and Russia to cut oil production will expire in April while Saudi Arabia is also preparing to increase its fossil fuel production amid the price war with Moscow. The tussle for market share between the world’s largest producers is expected to raise global daily oil production by over 2.5 million barrels, outpacing demand by 6 million barrels a day.
Rystad estimates that the world has about 7.2 billion barrels of crude and products in storage, including 1.3 billion to 1.4 billion barrels onboard oil tankers at sea. Typically, it would take nine months to fill the remaining stores, but challenges at many facilities are expected to shorten this window to only a few months.
With the world’s oversupply of oil expected to skyrocket next month at the current storage filling rate, prices are “destined to follow the same fate as they did in 1998,” Rystad analyst Paola Rodriguez-Masiu said. Meanwhile, oil producers such as Nigeria have started cutting official selling prices for their crude with a view to luring buyers, so as to clear an inventory of unsold cargoes.