Coronavirus has wiped out a decade of growing oil demand

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Just days after the biggest production drop in history, the WTI fell below $ 20 a barrel.

The oil world was hyper focused on what OPEC + could do in the past week, and what the Texas Railroad Commission could do as a follow-up. The cuts are massive. OPEC + alone will reduce nearly 10 million barrels per day (mb / d). The market-induced contraction will make the drop in production even more significant.

But the destruction of demand for oil is both greater and much more immediate. Demand for April is expected to drop 29 Mb / d, according to the International Energy Agency (IEA). Curiously, many investment bank predictions have predicted a V-shaped recovery for the global economy, but this scenario seems increasingly optimistic.

“The world economy has been under pressure in a way that has never been seen since the Great Depression of the 1930s; businesses fail and unemployment rises, “wrote the IEA in its April oil market report, its first since the foreclosure measures became truly global. “Even assuming travel restrictions are relaxed in the second half, we expect global oil demand in 2020 to drop 9.3 million barrels per day (mb / d) from 2019, wiping out nearly a decade of growth. “

The IEA assumes a V-shaped recovery version, although it does indicate that demand will decline for the rest of the year, including a drop of 26 Mb / d in May. For the entire year, the IEA sees demand contract by 9.3 Mb / d.

In this context, the OPEC + agreement is not able to cause an immediate rebound in prices. “There is no workable agreement that could reduce supply enough to compensate for these short-term demand losses,” said the IEA. However, the agency said the OPEC + deal was a “solid start” that could reduce the build-up of stocks.

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Because the OPEC + agreement falls far short of decimating demand, further reductions in supply are to come, whether governments prescribe them or not. As pipelines and storage tanks fill, local prices fall. Western Canada Select has been trading in single digits since late March – WCS is currently below $ 5 per barrel.

WTI in Midland is as low as $ 10 a barrel, while West Texas Sour in Midland has plunged at $ 7 a barrel. These are prices that force immediate closings.

The shale industry in the United States spent Monday wondering whether or not the Texas Railroad Commission should regulate production. “No one wants to give us capital because we have all destroyed capital and created economic waste”, Scott Sheffield of Pioneer Natural Resources Told the Texas Railroad Commission. “If the Texas Railroad Commission does not regulate in the long term, we will disappear as an industry like the coal industry,” he said. This comment comes after years of shale rulers boasting of low equilibrium prices.

But the notion of regulation has infuriated other oil executives, some of whom have hinted that producers may be trying to find a legal loophole in their contracts. Diamondback Energy has even threatened to cease all operations if Texas regulators impose production cuts. “Diamondback will not use any service providers to drill, complete or produce wells during the pro-rata period,” said Diamondback chief financial officer Kaes Van’t Hof, warning of “a sector with zero income and zero employment ”.

It doesn’t matter what Texas RRC does. Decreases in production happen in one way or another.

Global upstream investment is expected to contract by 32% this year, to $ 335 billion. The first to be cut will be in the United States and Canada. “Independent, highly leveraged independent US companies had previously reported a 10% year-over-year drop in investment, but spending is now likely to drop 30% to 40% to free up money for service reimbursements” , said the IEA.

The agency said that about 2.2 mb / d of US oil supply cannot even cover operating costs with WTI at $ 20 per barrel, including 1.2 mb / d of conventional supply. . Another 1.3 mb / d of losses could come from the sharp drop in existing shale production.

By Nick Cunningham of Oilprice.com

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