According to many accounts, the EIA’s crude oil forecast looks tame compared to what other independent analysts predict, and the deal-no-deal that has so far emerged from the OPEC virtual meeting Thursday will not offset anyone’s forecast.
The EIA predicts that global stocks of liquid fuels will increase on average by 3.9 million b / d in 2020, compared to 0.2 million b / d down in 2019. The agency expects inventory build-up to be highest in the first half of the year, as the world continues to face serious foreclosure and very limited air travel. Crude oil volumes are also expected to drop from 5.7 million bpd in the first quarter to 11.4 million bpd in the second quarter.
The short-term forecasts from the IEA and trading houses are much worse.
IEA sees global oil demand drop by about 20 million barrels per day while Trafigura and Vitol see April’s request dropping a staggering 30M bbl / day.
Even worse: JP Morgan now calls for a 40% drop in Q2 GDP, as well as job losses of 25 million. These are figures that will decimate the demand for fossil fuels.
Falling demand by 20 to 25 million barrels a day for just three months could have devastating consequences, as it could lead to an increase in global stocks of around 2,200 million barrels, or about two third of current OECD stocks of 3,000 million barrels.
Remember, the figure of 3,000 million barrels of the OECD is what we call “minimum operating levels,” which means unusable oil that is used to fill the pipeline or fill the tank, etc.
The stocks available are much lower than that. In other words, the available storage could fill up much sooner than we think. And the available floating storage is in a critical situation: at 100 million barrels, it won’t really matter at this point.
From this perspective, oil producers may have little choice but to cut production in just six weeks. The market will decide for them and no agreement will be necessary.
Premium: where is the oil going after the biggest drop in production in history?
However, the window for action before everything gets really dire could be much narrower than many might imagine, as the ongoing COVID-19 pandemic is set to continue to cause an unprecedented collapse in global demand for oil.
Indeed, during the OPEC virtual meeting on Thursday evening, OPEC secretary general Mohammad Barkindo noted this: “To put this in a certain context, the OPEC Secretariat’s assessment of global capacity of available oil storage amounts to over a billion barrels. Given the current unprecedented supply and demand imbalance, there could be a colossal surplus of 14.7 million barrels per day in 2Q20. This oversupply would add an additional 1.3 billion barrels to global crude oil stocks, thereby depleting the available global crude oil storage capacity during the month of May. “
The problem is that we don’t have a clear picture of the storage situation. We can only concoct a general idea.
Talk to MarketWatch, Geoggrey Craig, global energy analyst at Ursa, said that while his company uses satellites to track global storage levels, it looks like there is still around 40% of the world’s storage capacity, or around 1 .5 billion barrels, which could be reached “in a matter of months. ”
He also noted that “oil stocks mimic the pattern of the epidemic and the way it has spread,” as China’s stocks begin to decline somewhat, now that China relaxes lock restrictions in the hometown of Wuhan, although there are fears of a new wave of infections.
By mid-May, commercial oil storage in the United States could be full, according to Plains All American Pipeline, one of the largest intermediary companies in the United States.
Premium: missiles fired in Iraq as proxy war heats up
In one Thursday deposit with the Texas Railroad Commission cited by Argus, Plains said that crude oil demand from US refineries would drop by at least 30% (about 5 million barrels per day), while crude exports would drop by about 1 million barrels per day.
In the meantime, Trump has attempted to push funding to buy American oil to fill the Strategic Oil Reserve (SPR) in order to ease some of the pressure on storage capacity in the overhang.
So far, these efforts have failed.
The US Congress rejected a plan to spend $ 3 billion on the economic stimulus package to buy oil to fill the United States’ strategic reserve to solve the problem of storage capacity. This financing would have bought some 77 million barrels of oil for the SPR. Instead, the Department of Energy will buy oil by solicitation rather than purchase, which means it will “buy” oil on temporary storage contracts in the SPR. In other words, the government will space rental in the SPR.
And although all the attention is focused on the global production reduction agreement which now apparently relies on Mexico, even if this agreement reaches 15 million b / d, it will not be enough to compensate for the glut crisis ‘supply / storage. Most analysts say that we need more than 18 million bpd to even dampen confidence and keep prices from falling further.
By Alex Kimani for Oilprice.com
More readings from Oilprice.com: