Explainer: 10 signs of crisis in oil industry

US, WASHINGTON (ORDO NEWS) — The oil industry suffered from a simultaneous supply and demand crisis in March, when the coronavirus pandemic reduced fuel consumption and Saudi Arabia’s leading oil producer maximized production by unleashing a price war with competitors.

Oil prices this month lost about 45% and fell below the cost of most of global production, with energy companies worldwide cutting costs by tens of billions of dollars.

The collapse in demand and the failure of energy diplomacy between Saudi Arabia, Russia and other producers have triggered an unprecedented reaction from governments and investors. Here are ten signs that the industry is in crisis.

Saudi Arabia went on the offensive

Riyadh shocked the oil industry by taking the offensive after the failure of negotiations with Russia on a deal to reduce supply, designed to offset the impact of coronavirus on demand.

Saudi Arabia lowered export prices and announced that it would produce a record 12.3 million barrels per day, flooding a market that does not need as much oil. She aimed a fleet of tankers at oil refineries that buy Russian oil, as well as the United States, destroying the profit margin of American exports.

These steps were all the more shocking because they came from a manufacturer who for many years played the role of a “central bank” of the industry. The kingdom is the de facto leader of the Organization of Petroleum Exporting Countries (OPEC) and for decades has adjusted production more than any other producer to balance markets.

TEXAS CONSIDERING REDUCED PRODUCTION?

Producers in the US main oil producing region, Texas, turned to state industry regulators and asked to intervene to reduce production for the first time since 1973. Leaders of the regulator and other groups in the oil industry reacted to this idea with skepticism.

With OPEC?

One of the three leaders of the Texas oil regulator called the OPEC Secretary General to discuss the market. Ryan Sitton said Friday that Texas could consider cutting production by 10%, possibly in coordination with the cartel. So far, American shale oil producers have not dared to consider the possibility of a coordinated reduction in production, fearing violation of US antitrust laws.

HISTORICAL SALES

Over the past two weeks, there have been three of the sharpest drops in the Brent benchmark grade of oil – March 9, March 16 and March 18.

March 9, Brent fell 24%.

March 16, Brent fell 11%

March 18, Brent fell 13%.

On March 23, the gasoline market in the US experienced the strongest drop of the day: futures lost 32%, reaching a record low.

AUTOMOTIVE STORAGE

Aviation fuel deteriorates quickly during storage and then cannot be used. However, demand fell so quickly that companies, including oil giants BP and Royal Dutch Shell, decided to rent tankers just to store unnecessary fuel.

PROCESSING GASOLINE IS MONEY

Want to make gas? It will cost money. On Monday, the US gasoline production margin – the price of a barrel of oil minus the price of a barrel of gasoline – turned out to be in negative territory, which means that refiners will lose money by buying oil to produce fuel. Gasoline, as a rule, is the driving force of the entire energy complex, since fuel for vehicles accounts for most of the demand for oil worldwide. On Monday, margin fell to minus $ 1.11 per barrel, which is the lowest since 2008.

RUSSIA DEFENDS, ROSNEFT TO CELEBRATE SHALE PROBLEMS

The head of Rosneft, Igor Sechin, did not want to lose ground at a time when the American shale faced the crisis. Oil prices could return to $ 60 a barrel if shale oil leaves the market, he said on Friday. On Monday, his rival, co-owner of Lukoil Leonid Fedun, said that this would be a war of attrition.

Ethanol? NO LONGER

Deliveries of corn and sugar this year will increase as fuel suppliers make less ethanol for gasoline. Companies such as France’s Tereos are reorienting ethanol production, for example, to manufacture disinfectants, while Brazilian sugar makers are planning to produce more sweeteners than fuels.

EVENING CRAZINESS

Volatility in the oil market is compounded by speculators who drive quotes at the end of trading. Last Thursday, the rally was so great that trading after the official close had to be stopped. On Friday there was a reversal, and by the end of trading prices fell $ 4.

“This is a crazy market. I don’t know how to trade on it, ”said one of the futures traders.

Refinery CLOSED

In early March, the French Total closed the Grandpuits refinery for maintenance. When it came time to resume production of 102,000 barrels per day, Total said … it doesn’t matter. Demand fell so quickly that the company decided that the refinery simply would not work. While some refineries are shutting down, large refineries outside of Los Angeles are cutting back on production due to lack of demand.

PETROL FACILITIES BECAME SECURE

One of the countries most affected by the coronavirus pandemic, Italy, is simply closing its gas stations. They began to close on national highways since March 25, because health safety standards and business operations cannot be guaranteed, operators said.

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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.