(washingtonpost) The spiraling drop in demand for oil because of the novel coronavirus — as airlines cancel flights, commuters work from home or lose their jobs, and ships ride at their moorings — has far outstripped this month’s Saudi-Russian oil war as a factor in the price collapse, analysts now believe.
And some are arguing that this opens the door to a major restructuring of the oil business, as wells shut down and marginal companies go under.
With storage capacity fast filling up, oil firms will have to start imposing production cuts, and many probably will seek help from Washington.
“This is a historic and unprecedented collapse,” Jason Bordoff, director of the Center on Global Energy Policy at Columbia University, said in a tweet. “...The oil market is broken. There is simply nowhere physically to put all the oil when no one needs it. And prices will continue falling as we fill every nook, crevice and bathtub.”
The cost of a barrel went tumbling on March 7 when the Saudis announced they would be ramping up their production, and they were followed in turn by the Russians. Wednesday is the day those production increases are supposed to start, but by now, it’s almost a sideshow. The two countries, joined by others, will be increasing their production by 2 million to 3 million barrels a day. However, global demand has dropped by 14 million barrels a day, and some forecasters believe that will drop by 26 million barrels in April.
That would be a 25 percent decline in oil consumption.
President Trump, who at first welcomed lower oil prices as a means of boosting the economy, told Fox News on Monday, “I never thought I would be saying this: Maybe we have to have an oil [price] increase. Because we do. The price is so low now.”
He spoke with Russian President Vladimir Putin on Monday, and they discussed the price of oil as well as the covid-19 pandemic. “President Trump and President Putin agreed on the importance of stability in global energy markets,” the White House said later. They agreed that oil policy discussions between the two countries would continue at the Cabinet level, the Kremlin said.
The price for West Texas Intermediate briefly dipped to lower than $20 a barrel Monday, down nearly 67 percent from February.
A big part of the shock is that this is all happening so fast.
“The oil market supply chains are broken due to the unbelievably large losses in oil demand, forcing all available alternatives of supply chain adjustments to take place during April and May,” wrote Bjornar Tonhaugen, the head of oil markets for Norway’s Rystad Energy. That means less oil pumped and more oil stored, as long as storage capacity still exists, on land and on leased tankers at major oil terminals.
“The worst is still ahead for oil prices,” S&P Global Platts Analytics said. “This will be the worst demand contraction ever recorded.”
The company predicts a price of $12 a barrel for Brent crude in May, but “prices could easily dip into the single digits, whatever it takes to get significant supply off the market and quickly.”
“Not only is this the largest economic shock of our lifetimes,” Goldman Sachs said in a note Monday, “but carbon-based industries like oil sit in the cross-hairs as they have historically served as the cornerstone of social interactions and globalization, the prevention of which are the main defense against the virus.”
The company said that the battering could provoke a sharp contraction in the number of producing wells and a consolidation of oil-field companies. Rigs in landlocked areas such as the Bakken Formation in North Dakota, the Permian Basin in Texas and Oklahoma, and the Canadian oil sands would be hit hardest, the company said, because they are a long way from saltwater ports and production costs are already higher than at offshore platforms.
The Norwegian company Equinor, for instance, announced Monday that it would be stepping up production at a new North Sea field called Johan Sverdrup. The actual cost to pump a barrel of oil there, not counting the investment in drilling, is about $2, the company said — or about one-fifth the cost of a typical rig in North Dakota.
The Goldman Sachs report does note that, given the expense of closing a well, some oil producers may continue to pump and sell their oil at a loss, if they can find anyone to take it.
The $2 trillion stimulus bill enacted last week did not contain any special provisions for the oil industry because of Democrats’ objections. But oil companies probably will continue to press for help from the government.
“Small- to medium-size American energy companies and their employees should be provided the same relief being provided to other parts of our economy,” Energy Department spokeswoman Shaylyn Hynes said in a statement.
“Production is going to have to be reduced or even shut in. It is now a matter of where and by how much,” said Jim Burkhard, vice president and head of oil markets for the company.
The pendulum may well swing too far, analysts said. When the demand for oil starts growing again, and surplus stocks have been depleted, there will be fewer wells because of the shutdowns, and that could easily lead to a squeeze and cause a sharp spike in prices. Two weeks ago, Igor Sechin, the head of Russia’s Rosneft oil giant, told the RIA Novosti news agency that he expects low prices to drive shale producers — that is, American and Canadian companies, primarily — out of business, and following that, he said, oil should once more rise to about $60 a barrel.