By many accounts, EIA crude oil forecasts appear tame compared to what other independent analysts are predicting, and the deal-no-deal that has so far come out of Thursday’s virtual ‘OPEC’ meeting won’t offset anyone’s predictions.
The EIA expects global liquid fuels inventories to increase by an average of 3.9 million b/d in 2020 compared to 0.2 million b/d decline in 2019. The agency expects inventory builds to be highest during the first half of the year as the world continues to grapple with a serious lockdown and severely limited air travel. It also expects crude builds to jump from 5.7 million b/d in the first quarter to builds of 11.4 million b/d in the second quarter.
Near-term predictions by the IEA and trading houses are much worse.
The IEA sees global oil demand falling by about 20 million barrels per day while Trafigura and Vitol see April demand dropping a staggering 30M bbl/day.
Even worse: JPMorgan is now calling a 40% dip in GDP for Q2, along with job losses that will hit 25 million. Those are numbers that will decimate fossil fuels demand.
Demand falling by anything like 20-25M bbl/day for just three months could have devastating consequences because it could mean increasing global inventories by ~2,200 million barrels, about two-thirds of OECD’s current stockpiles of 3,000 million barrels.
Mind you, the 3,000 million barrel figure by OECD is what is known as “minimum operating levels,” which means unusable oil that serves as pipeline fill or tank bottoms and so on.
Available inventories are much lower than that. In other words, available storage could fill up much sooner than we think. And available floating storage is in dire straits: At 100 million barrels tops, it won’t really matter much at that juncture.
Viewed from that perspective, oil producers might not have much of a choice whether to cut production in as little as six weeks from now. The market will decide for them, and no agreement will be necessary.
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Yet, the window to act before everything gets really dire could be much narrower than many might imagine, with the ongoing COVID-19 pandemic expected to continue causing an unprecedented collapse in global oil demand.
Indeed, during the virtual OPEC meeting on Thursday night, OPEC Secretary General Mohammad Barkindo noted this: “To put this in some context, the OPEC Secretariat’s assessment of available global oil storage capacity stands over 1 billion barrels. Given the current unprecedented supply and demand imbalance there could be a colossal excess volume of 14.7 million barrels a day in the 2Q20. This oversupply would add a further 1.3 billion barrels to global crude oil stocks, and hence exhaust the available global crude oil storage capacity within the month of May.”
The problem is that we don’t have a crystal clear picture of the storage situation. We can only cobble together a general idea.
Speaking to MarketWatch, Geoggrey Craig, a global energy analyst at Ursa, said that while his company uses satellites to track global storage levels, it looks like global storage capacity still has about 40% left, or around 1.5 billion barrels, which could be reached “in a matter of months.”
He also noted that “oil inventories are mimicking the pattern of the outbreak and how it spread,” with China inventories starting to drop somewhat, now that China is relaxing lockdown restrictions in the origin city of Wuhan, though there are fears of a new wave of infections.
By mid-May, U.S. commercial oil storage could be full, says Plains All American Pipeline, one of the largest midstream companies in the United States.
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In a Thursday filing with the Texas Railroad Commission cited by Argus, Plains said U.S. refinery demand for crude would decline by at least 30% (around 5 million barrels per day), while crude exports would fall by about 1 million barrels per day.
In the meantime, Trump has been trying to push through funding to buy up American oil to fill the Strategic Petroleum Reserve (SPR) to alleviate some of the pressure on storage capacity in the overhang.
So far, those efforts have failed.
The U.S. Congress rejected a plan to spend $3 billion of the economic stimulus package to buy up oil to fill the U.S. strategic reserve in an effort to relieve the storage capacity problem. That funding would have purchased some 77 million barrels of oil for the SPR. Instead, the Department of Energy will acquire the oil through solicitation rather than purchasing, which means it will ‘buy’ oil on contracts for temporary storage in the SPR. In other words, the government will be renting out space in the SPR.
And while all attention is focused on the global output cut deal that now apparently hinges in Mexico, even if that deal hits 15 million bpd, it won’t be enough to offset the supply glut/storage crisis. Most analysts say we need upwards of 18 million bpd to even put a dent in sentiment and keep prices from crashing further.
By Alex Kimani for Oilprice.com
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