Crash after crash: when the storm in the oil market subsides

US, WASHINGTON (ORDO NEWS) — Against the background of gloomy prospects for the global economy, any signs of slowing global oil demand will again and again lead to a collapse in prices. It will be possible to break out of the vicious circle only with a reduction in production, which producers will be forced to go regardless of OPEC’s will, analyst Kirill Rodionov believes.

Previously, something similar could be expected only in relation to regional North American varieties that are insignificant for the world market, for example, high-sulfur West Taxes Soar (with a sulfur content of 1.5% versus 0.4% for WTI, according to S&P Global Platts), the price of which at the end of March reached $ 0.6 per barrel, or of the Canadian grade Western Canadian Select, a month before WTI overcame the milestone of $ 10 per barrel.

Not only in storage

Such a sharp price collapse can only be partially attributed to the widely discussed risk of oil storage shortages. By April 10, according to the US Department of Energy’s Energy Information Administration (EIA), oil storage capacities in Cushing were 70% full, and 65% in the country as a whole, with February 48 and 57% being used up. If commercial oil reserves will grow in the United States at the same rate as in the first full week of April (by 19.2 million barrels, to 503.6 million), then to fill all US storage facilities (in the amount of 777.2 million barrels) enough for fourteen with a few weeks. And in Cushing, where over the same seven-day period, reserves increased from 49.2 million to 55 million barrels (with a maximum of 78.2 million barrels), only a month will be enough for this.

This is partly due to the fact that producers began to use oil supertankers more often to store raw materials, on board which, by April 20, according to Refinitiv estimates, there were 119.6 million barrels of oil – two times more than the average for 2019 (62 , 3 million barrels). For the same reason, freight costs are rising: for example, from February 20 to April 20, rates for oil transportation from the Gulf of Mexico to the main European hub Amsterdam – Rotterdam – Antwerp increased one and a half times (from $ 63 to $ 94 per ton), and from the North Sea to the eastern coast of the United States – more than doubled (from $ 47 to $ 139 per tonne). Rates for the same period increased even more for sea transport to China – both from the Persian Gulf (from $ 41.4 to $ 154.5 per ton) and from West Africa (from $ 47 to $ 139 per ton), for which in 2018 had 9BP data ).

Nervous tread of demand

However, a drop in demand played an equally important role, the April estimates of which look gloomy even in comparison with the March projections. So, if a month and a half ago, the International Energy Agency (IEA) predicted that global oil demand in 2020 would decline by 90,000 bps, then last week it estimated a compression scale of 9.3 million bps per year on average , and directly in April – at 29 million b / s (year to year). Similarly, the situation was assessed by the EIA and OPEC, which in March pledged for 2020 an increase in global demand of 470,000 and 60,000 bps, respectively, and in April it already reduced by 5.2 million and 6.9 million bps .

The same applies to forecasts for the global economy, for which in March IHS Markit predicted a growth inhibition (up to 0.7% versus 2.6% in 2019), and in April – already a 3% drop, which should become more impressive than in 2009, the year of the Great Recession (-1.7%).

Thus, with the clarification of the contours of the crisis, his picture becomes more and more formidable. And therefore, any negative news can be perceived by the market as a pre-flood air wave, followed by a destructive snowfall.

The data on the load of the American refineries can also serve as a trigger, which by April 10 had been decreasing for three consecutive weeks (to 12.7 million bps from March 15.8 million bps, according to the EIA); and the fall in demand for gasoline, which over the same three weeks reached more than 40% in the United States (from 8.8 million to 5.1 million b / s); and on industrial production, the March fall of which (by 5.4% compared with February, according to the Federal Reserve) became the most serious since January 1946. The news about the collapse of the May WTI futures with expiration on April 21, which at the close of trading on Monday was trading on the New York Stock Exchange with a discount of $ 58 to the June futures (minus $ 37.6 against $ 20.4 per barrel) can play the exact same role. )

Invisible offer hand

In this regard, the market is unlikely to recover at least some stability in the coming weeks. In a situation where no one – neither companies, nor regulators, nor investors – knows when the demand will begin to grow steadily again, prices themselves can return prices to a more or less predictable corridor, which will dictate the need for producers to reduce production.

Actually, this is already happening in the United States, where in the three weeks preceding April 10, production fell by 700,000 bps (to 12.3 million bps, according to the EIA), while the largest US companies barely managed to announce cuts this year capital expenditures. For example, ExxonMobil, according to Refinitiv estimates, will reduce them by 30.3% ($ 10 billion), ConocoPhillips – by 10.6% ($ 700 million), and Chevron – by 20% ($ 4 billion). British BP and the Anglo-Dutch Shell will reduce capex by the same 20% ($ 3 billion and $ 5 billion, respectively), while Italian ENI and Spanish Repsol – by 25% and 26% ($ 2.2 billion and $ 1.1 billion), and French Total and Norwegian Equinor – by 16.7% and 19% ($ 3 billion and $ 2 billion).

This will ultimately contribute to a reduction in production outside OPEC countries, which will reach 5.2 million bpd (year-on-year) in the fourth quarter, according to an IEA forecast in April . Thus, the natural stabilizer will work, whose role the participants in the OPEC + transaction unsuccessfully tried to take on, whose efforts supported the quotes for only a couple of days. A market decline in production – coupled with a delayed but inevitable recovery in demand – will sooner or later calm down the oil storm.

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