Oil glut, COVID-19 crisis punishing world crude prices

With demand and supply shock acting simultaneously, crude markets are imploding. And this is just the tip of the iceberg

Rashid Husain SyedThe global oil war is on and no one seems to be blinking.

Saudi Arabia is set to increase its crude oil exports in May by about 600,000 barrels per day (bpd), bringing its total petroleum exports to 10.6 million bpd, an official at the Saudi Arabian Energy Ministry told the Saudi Press Agency.

Russia isn’t backing down in the face of this increased production. However, Russian Deputy Energy Minister Pavel Sorokin insists the markets will start rebalancing in 2021.

World oil demand is down by 15 million bpd and could drop more in coming weeks as the COVID-19 pandemic crisis deepens around the globe.

Sorokin says influencing the market with the production cuts proposed by the Saudi-led Organization of Petroleum Exporting Countries would have been impossible.

So the crude oil markets, faced with the biggest supply glut ever seen, are being battered, with prices falling to levels not seen in 18 years.

With demand and supply shock acting simultaneously, crude markets are imploding. Global demand could plummet by some 20 million bpd, says Fatih Birol, executive director of the International Energy Agency.

The unprecedented market turmoil is the result of a combination of demand destruction and a supply surge following the breakdown of Saudi Arabia and Russia’s partnership. This is filling up inventories quickly, Birol said, emphasizing that oil storage units may become full “very soon.”

Goldman Sachs estimates global oil demand could plummet by 18.7 million bpd in April, as the world economy recedes as a result of COVID-19 isolation measures. That decline is a deepening from an estimated demand plunge of 10.5 million bpd in March.

That view is echoed by the world’s largest independent oil trader, Vitol, which says oil demand could slump by 15 million to 20 million bpd over the next few weeks.

The demand hit has made the task of balancing the markets with output cuts almost impossible. The crude free flow has only added to the gloom.

Adding another ripple, United Kingdom operator INEOS has decided to postpone its scheduled maintenance for the North Sea Forties pipeline system. Rystad Energy estimates this will add several hundred thousand barrels of oil to the market every day.

Consequently, markets have collapsed by almost 60 per cent. And this is just the tip of the iceberg, says Bloomberg.

The price rout is far deeper for actual cargoes, which are changing hands at large and widening discounts to the global benchmarks. The discounts mean that in the physical market, some crude streams are trading at $15, $10 and even as little as $5 a ­barrel.

Nigeria, the biggest oil producer in Africa, is selling its flagship Qua Iboe crude at a discount of $3.10 a barrel below the Dated Brent benchmark, the largest discount in at least two decades.

Colombia is selling its Vasconia crude at a discount of $7.75 a barrel to Brent, a four-and-a-half-year low.

“The physical oil market looks horrific,” Bloomberg quoted Kit Haines, an analyst at consultant Energy Aspects Ltd., as saying.

The price of Western Canada Select, the domestic heavy oil benchmark, followed up a brutal 30 per cent plunge last Thursday with another 28 per cent fall on Friday to reach $4.58 a barrel – just a fraction of other price benchmarks.

In central Montana, oil traded near $8 last week, having been above $30 at the start of the month.

Central Asian crude CPC Blend reportedly changed hands at an eight-year low earlier this month.

Even Saudi Arabia is suffering. With record discounts to European refiners, state-owned Saudi Aramco is set to sell its flagship Arab Light at around $15 a barrel in Rotterdam by the beginning of April if the benchmark Brent holds at current levels, Bloomberg said.

This is unprecedented. And it’s set to get worse.

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.

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