Oil could drop to $10 a bar­rel as world runs out of stor­age space

The Guardian - - Financial Coronaviru­s - Jil­lian Am­brose

The world may soon run out of space to store its ex­tra oil as Saudi Ara­bia pre­pares to in­crease its fos­sil fuel pro­duc­tion even as global demand for en­ergy con­tin­ues to fall ow­ing to the Covid-19 pan­demic.

Oil stor­age lev­els across the world’s fa­cil­i­ties have climbed to about three­quar­ters full on aver­age since the Jan­uary shut­down of ma­jor re­finer­ies in China’s in­dus­trial heart­lands to stem the out­break of the coro­n­avirus.

The oil in­dus­try is ex­pected to keep fill­ing oil stor­age with crude in the months ahead as the pan­demic’s eco­nomic con­ta­gion spreads through the rest of the world, cut­ting demand for nat­u­ral re­sources in­clud­ing oil.

Canada may be days away from run­ning out of stor­age for its do­mes­tic oil pro­duc­tion, ac­cord­ing to an­a­lysts at the con­sul­tancy Rys­tad En­ergy, and the rest of the world may fol­low suit in a few months.

The an­a­lysts ex­pect that oil-rich regions in western Canada will need to rein in pro­duc­tion by about 400,000 bar­rels of oil a day by the end of the month.

“Com­pound­ing the sit­u­a­tion is the near cer­tainty of a steep re­duc­tion in crude-by-rail ex­ports this year, as well as de­fer­ral of spring main­te­nance at sev­eral key oil sands min­ing projects,” said Thomas Liles, an an­a­lyst at Rys­tad.

The global oil in­dus­try may in­creas­ingly look to offshore oil tankers to store their ex­tra crude oil, but for this to be eco­nomic it would re­quire oil prices to fall fur­ther.

The global oil price fell to lows of $25 a bar­rel a last week, from more than $65 at the start of the year, and re­mains be­low $30 a bar­rel.

Rys­tad has warned the in­dus­try that the oil price may fall to $10 a bar­rel this year.

The hunt for af­ford­able oil stor­age would be made more dif­fi­cult af­ter Saudi Ara­bia’s “ves­sel book­ing spree”, which had pushed freight rates

“through the roof” in the past three weeks, the an­a­lysts said.

The world’s over­sup­ply of oil is ex­pected to bal­loon next month when an agree­ment be­tween the Opec oil car­tel and Russia to hold back oil pro­duc­tion ends. The col­lapse of the deal al­lows Saudi Ara­bia, Opec’s de facto leader, to race Russia to in­crease oil pro­duc­tion in an at­tempt to grab a greater share of the mar­ket.

The oil price war is ex­pected to raise the world’s oil pro­duc­tion by more than 2.5m bar­rels of oil a day, which would out­pace demand for crude by 6m bar­rels a day.

An­a­lysts at Rys­tad es­ti­mate that the world has about 7.2bn bar­rels of crude and prod­ucts in stor­age, in­clud­ing 1.3bn to 1.4bn bar­rels on­board oil tankers at sea.

In the­ory, it would take nine months to fill the world’s re­main­ing oil stores, but con­straints at many fa­cil­i­ties will shorten this win­dow to only a few months.

“At the cur­rent stor­age fill­ing rate, prices are des­tined to fol­low the same fate as they did in 1998, when Brent fell to an all-time low of less than $10 per bar­rel,” said Paola Ro­driguez-Ma­siu, an an­a­lyst at Rys­tad.

▲ Saudi Aramco crude oil stor­age tanks in Ras Ta­nura, Saudi Ara­bia

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