Brent crude has fallen below $20 per barrel and the June WTI contract has also collapsed, just days after the May contract fell into negative territory before expiration.
The oil market is feeling the full brunt of combined pandemic-related demand destruction and the supply surge in the wake of the Saudi-Russian price war. Now, oil storage is rapidly filling up, and could be weeks away from topping off.
Cushing, Oklahoma saw storage surge to 59.7 million barrels on April 17, up from 39 million barrels a month earlier.
The key storage hub of Cushing, Oklahoma saw storage surge to 59.7 million barrels on April 17, up from 39 million barrels a month earlier. The storage facility is on track to be filled up by the middle of May. However, the remaining storage has been entirely leased, meaning there is nothing left over for a producer looking for storage.
The same is increasingly true for storage facilities everywhere. With global oil demand down by around 30 million barrels per day (Mb/d), storage is filling at a blistering rate. Globally, around 50 million barrels of oil is funneled into storage each week, according to Bloomberg. That puts global storage at risk of filling up by June.
More oil is also going into supertankers at sea. Floating storage has surged 76 percent, according to the Wall Street Journal. The WSJ says there are about 19 tankers sitting idle off coast of southern California.
Saudi Arabia is also storing its oil at sea, a dramatic development given that Riyadh increased production in March in an effort to flood the market. But just as Saudi Arabia ramped up supply, the global economy went into hibernation. Now Saudi Arabia is struggling to find buyers for its crude. At least 10 supertankers were holding Saudi oil at sea, as of April 21. “The kingdom is now facing a situation where they may have to shut parts in their production, likely from Ghawar and other fields because they don’t have buyers,” a senior executive at Saudi Aramco told the Wall Street Journal.
As the market began to fall apart in March, oil producers stayed the course in hopes that OPEC+ might ride to the rescue. But even a historic production cut won’t be enough. With storage running out, prices are collapsing, particularly for oil that is trapped in locations far from storage or a pipeline. Some areas have seen physical prices fall into negative territory, meaning that producers have had to pay to get rid of their own oil.
If global E&P companies are expecting OPEC+ to ‘save the day’, we may be in for a hard impact when we hit the storage wall.”
“The storage clock is ticking for producers and we are approaching the final countdown if no further action is taken,” Bjornar Tonhaugen, head of oil markets at Rystad Energy, said in a statement. “We believe producers in remote onshore locations with limited demand flexibility and storage capacity are likely candidates to have to reduce production soon. If global E&P companies are expecting OPEC+ to ‘save the day’, we may be in for a hard impact when we hit the storage wall.”
With storage nearly filled, shut ins are now beginning to mount. ConocoPhillips said it would curtail output by 225,000 barrels per day. Continental Resources shut in just about all of its production in the Bakken. In fact, more than 6,000 wells in North Dakota have already been shut in, cutting production by 405,000 b/d, according to state data.
The company that operates the trans-Alaskan pipeline announced a 10 percent cut in North Slope production, removing 50,000 b/d.
The shut ins are starting to affect offshore supply as well. Smaller and less competitive fields are starting to close, but they may not bounce back in the same way that an onshore project might because restarting is costly. On April 26, Diamond Offshore Drilling filed for bankruptcy protection.
The global surplus is so bad that some in Russia are considering burning their oil to take it off of the market, according to Reuters.
In total, the U.S. has at least 600,000 b/d offline, plus another 300,000 b/d in Canada. But these are trivial numbers compared to what is coming in the next few weeks. Roughly 18 Mb/d of supply needs to be shut in by mid-May because storage will be tapped out, according to Goldman Sachs.
“We are moving into the end-game,” Torbjorn Tornqvist, head of commodity trading giant Gunvor Group Ltd., told Bloomberg. “Early-to-mid May could be the peak. We are weeks, not months, away from it.”
The number of bankruptcies hitting the U.S. shale industry is expected to accelerate. The “market is telling us we should not drill another well in the U.S.” for the next two years, Pioneer Natural Resources CEO Scott Sheffield told the Washington Post.
The problem for the oil industry is that the global pandemic threatens to hamper economic activity for months, and there may be no return to “normal” until a vaccine is developed, which could be years away. The outlook for oil producers over the next year or two is grim, but the damage to supply because of tapped out storage is set to unfold over the next few weeks.