The outlook for U.S.
shale continues to darken with WTI testing sub-$20 territories. The supply glut
could grow worse as the contraction in demand continues to deepen.
In early March, a few
forecasters suggested that oil demand may be slightly negative in 2020, dipping
by a mere 220,000 BPD. The call was somewhat provocative at the time.
By the middle of the
month, some forecasters said the demand hit could be as large as 10 million
barrels per day (MB/d) in the second quarter. A few days later, another set of
analysts put it at 13-14 MB/d. By last week, the IEA warned demand could fall
by 20 MB/d.
The negative
revisions could keep on coming. Oil prices dropped sharply during midday
trading on Monday. “For us, this is simply reflecting the increasing awareness
that oil demand is breaking away, probably by much more than the 20% we have
currently in our books for April/May,” JBC Energy said.
The market has fallen
apart rather quickly. Some areas are seeing catastrophically low pricing,
including prices dipping into negative territory in areas far from takeaway
infrastructure.
“Estimates for the
demand side are being revised downwards on an almost daily basis, while on the
supply side there is still no sign of any reconciliation between Saudi Arabia
and Russia,” Commerzbank said in a note on Monday.
Analysts are now
watching global storage capacity, which could fill up in weeks or months at
most. The contango for Brent between May and November has widened to a record
$13.45 per barrel, a reflection of the massive short-term glut.
“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:
Onshore product storage surge, refinery run rate cuts globally, a massive
increase in floating storage deals and upstream supply shut-ins,” Rystad
Energy’s head of Oil Markets Bjornar Tonhaugen said in a statement.
Plains All American
Pipeline reportedly sent a letter to U.S. oil producers asking them to curtail
production, according to Bloomberg, and other pipeline companies are making
similar requests. “We are sending this proactive request to our suppliers to
ask that you take steps to reduce oil production in response to the pandemic,”
Plains said in the letter, according to Bloomberg.
Goldman Sachs sees
U.S. oil production falling by 1.4 million barrels per day (MB/d) between now
and the second quarter of 2020. However, the bank said that declines from lower
drilling rates today wouldn’t necessarily translate into lower production until
the third quarter of this year.
Bank of America said
so much depends on whether or not the world can move past the pandemic in the
next few months, or if the scars linger into next year and beyond. “The oil
market expects these massive supply and demand shocks to fade within 3 to 4
months, a plausible outcome,” the bank said. “However, if either shock (or
both) last for 12 months or longer, the gigantic surplus could keep oil prices
below $30/bbl for an extended period.”
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