Demand for oil is expected to drop 27 million barrels per day (mb / d) in April, more than anything that has happened in the history of oil.
The drop in demand could lead to a replenishment of stocks, imposing significant reductions by refineries and oil well closures, according to a new report by Rystad Energy. The blow to demand “will last longer” than expected, as more countries are imposing blocking orders while “the spread of the virus will resist restrictions more than we expected,” the firm said. Rystad sees demand reaching around 20 mb / d in May and more than 15 mb / d in June. Demand growth remains negative for the duration of 2020.
New data from India shows that demand for oil has dropped by 70% as the country has entered a lockdown phase.
Meanwhile, in the United States, gasoline demand fell to 5 mb / d in the United States for the week ending April 3, down from 9.6 mb / d three weeks earlier.
The collapse in demand and prices quickly translated into a decline in supply. Refinery cycles fell to 13.63 mb / d on April 3, down 2.2 mb / d in two weeks. Crude oil inventories surged. Despite heavy cuts in refineries, gasoline stocks also increased by more than 10 million barrels. Stunning numbers all around.
The sudden stop in demand returns to the well head. EIA data shows that oil production in the United States fell 600,000 bpd for the week ending April 3, “potentially announcing a faster than expected price reaction”, as JBC Energy has interpreted the data in a note.
The prices that oil drillers get behind the pipeline – that is, not the broader benchmark of WTI, but what they can get in West Texas or North Dakota – have dropped much more strongly than WTI or Brent. Midland rebates have widened to around $ 6 a barrel under the WTI, according to Morgan Stanley. Bakken oil now sells for $ 14 a barrel.
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Pipelines are clogged with oil, so drillers have nowhere to sell. “In response to falling prices and the potential loss of flow assurance, we expect producers to begin closing wells in production within the next few weeks,” writes Morgan Stanley in a note. . “Production inherited from older wells appears to be the most at risk, where we expect costs to be higher than these basin averages.”
Much hope from American industry rests on the OPEC + cuts. At the time of writing this article, an OPEC + agreement was being developed. reports suggesting somewhere around 10 mb / d, although the exact duration and conditions of the cuts remain unclear.
In any case, production cuts – imposed from top to bottom or not – are in sight. Several analysts say that even a historic drop in OPEC + will not be enough. “At best, the planned production cuts could somewhat cushion the blow from this drop in demand,” Commerzbank wrote on Thursday. “So the price of oil faces considerable downside risks after today’s video conference. “
In a separate report, Goldman Sachs said that even if OPEC + manages to concoct 10 mb / d of cuts, an additional 4 mb / d of “cuts” due to market-induced closings are likely. As a result, even though there may be a short price rally since OPEC + was announced, “this support will soon give way to lower prices with the risk of lowering our short-term forecast of 20 $ / barrel for WTI, “said Goldman. “In the end, the magnitude of the demand shock is simply too great for a coordinated reduction in supply, thus paving the way for significant rebalancing. “
As a sign of the times, Continental Resources announced on Tuesday that it will suspend its dividend and also cut its own supply by 30% for April and May. Parsley Energy has said it will close 400 wells in the Permian.
“While any potential reduction in Thursday’s OPEC + meeting is positive, we do not expect a deal large enough to” correct “the short-term excess supply given the magnitude of the lost demand for the Covid-19 pandemic, “said analysts at Morgan Stanley. ” [W]We continue to see other shutdowns and reductions in oil production as likely with or without coordinated supply disruptions. “
By Nick Cunningham of Oilprice.com
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