Oil market faces storage crisis in crude flooded world | Business

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Sultra-powerful tankers float outside the world’s largest seaports with enough oil to double world demand. Just a few months ago, these ships plied the globe loaded with up to 2 million barrels. Today, they are immobile and swollen with crude that no one will buy.

The record volume of stranded gross cargoes illustrates the deepening crisis in the global oil industry. Demand for oil has dropped so much and at such a rate that there is little space left on earth to store crude oil made redundant by the coronavirus crisis. At least 160 million barrels are now stored offshore, outside global shipping ports from Singapore to Suffolk and along the U.S. Gulf Coast, as oil traders prepare for storage facilities reach their capacity imminently.

Market forecasts suggest that global storage of conventional oil – which can hold around 3.4 billion barrels – will be filled to its limits within the next month. In the meantime, oil traders are turning to alternative storage options: supergiant tankers, rail freight cars, and even underground salt caverns have become havens for storing millions of barrels of excess crude.

“We feel like noon in the oil markets,” says Norbert Rücker, an analyst with the private banking group Julius Baer. “Storage near capacity limits, which fills up quickly, creates a dazzling tension filled with fear of an overflow of the oil market.”

WTI price table

Fear of the market has caused world oil prices to drop to lower levels since 1999. The price of crude oil to be delivered next month in the US oil market, known as West Texas Intermediate (WTI), has turned negative for the first time in history last week. Oil producers without access to local storage facilities were forced to pay buyers for supplies, with market prices falling to almost $ 40 a barrel.

Chris Midgley, chief data analyst, S&P Global Platts, estimates that the largest U.S. oil storage facilities in Cushing, Oklahoma are already two-thirds full, and the remaining space has been purchased by oil traders and brokers.

“It’s probably the same for worldwide storage,” he says. “This is where we come to floating storage. For many in the petroleum industry, the only option is to get a ship and put oil in it for one to two months. If you can’t find a buyer or ship, you have the last option to close [suspend] production. “

In the United States and Canada, where the cost of transporting oil from landlocked oil fields is higher than in regions with offshore platforms, oil producers have made the difficult decision to close their wells.

Stopping production results in high costs and a forced shutdown may cause irreversible damage to the oil wells, which may not produce the same volumes when restarted. The risk of a sudden stop must be weighed against the risk of continuing to pump crude.

In this context, the oil market could have already crossed a tipping point, according to analysts.

The coming weeks are expected to bring the gravest crude overhang ever seen. Rystad Energy, a Norwegian consulting company, estimates that demand for oil will drop 26 million barrels per day below the average demand recorded last year.

“We believe the market has received the latest warning regarding the urgency of the soon-to-be-crowded global storage situation this week,” said Bjørnar Tonhaugen, head of oil markets at Rystad.

The consulting firm estimates that unwanted global crude oil will reach reservoir peaks in May unless oil wells begin to close on a scale never seen before in the global industry.

“In our view, a wave of closures is inevitable for the oil market to approach equilibrium. Lack of storage is not only a theoretical problem, but a practical problem. Unless production stops, the extracted oil will literally have nowhere else to be stored, “says Tonhaugen.

“It’s not something the industry has never seen or never been prepared for; that may be why we are seeing a slow reaction. A major shock is brewing for producers and unless there is a firmer response from them to voluntarily reduce production, we will soon be discussing the greatest energy crisis in history. “

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