The novel coronavirus (COVID-19), which has caused low oil consumption and the rapid increase in crude oil stocks around the world, may soon push the price of international oil benchmark Brent crude below $10 per barrel, according to experts on Wednesday.
The rapid spread of COVD-19 has lowered economic activity in many countries, caused weak oil demand, led to the incremental rise in the supply glut while heightening the risk of oil storage capacity hitting its limit.
Global oil stock capacity stood at 6.7 billion barrels, of which 42 billion barrels, or 63%, was full by the end of January, according to the International Energy Agency (IEA).
Available capacity is forecast to be full in June this year if global oil consumption remains low and oversupply keeps escalating at this pace.
In the U.S., oil storage in Cushing, Oklahoma -- the heart of the country's oil pipeline network – shows that around 60 million barrels of oil are in inventory out of some 90 million barrels of capacity as of last week. With an extra supply of 16 million barrels of oil coming into storage every week, Cushing could soon run out of available capacity at the beginning of May.
The price of American benchmark West Texas Intermediate (WTI), which is determined in Cushing, plummeted Monday into negative territory for the first time in history by falling as low as -$37.63, indicating that there is such a glut of supply that oil producers would have to pay buyers to unload their oil inventory.
- "Brent will fall below $10 very quickly"
Mark Rossano, an energy analyst at the U.S-based market intelligence company Primary Vision, told Anadolu Agency that although Brent crude has more "avenues for storage" since it is used as a global oil benchmark, he said it "would fall below $10 very quickly."
“Brent and WTI will continue to fall under the weight of oversupply across the globe as storage space runs out and floating storage surges past 120 million barrels," Rossano said.
"WTI Cushing is close to being filled, and the lack of storage in this region will keep pressure across the WTI contracts," he explained.
The international benchmark was trading around $16 per barrel on Wednesday, falling from $45 a barrel when OPEC and its allies met in Vienna, Austria but failed to make additional cuts in their production.
The 23-member group known as OPEC+, led by Saudi Arabia and Russia, agreed on April 12 to lower their collective output by 9.7 million barrels per day starting from May 1, but this leaves massive oil supply surplus in the market until then.
"Even as OPEC+ cuts production, they are still maintaining or even increasing the volume of exports into a grossly oversupplied market," Rossano said.
He maintains that OPEC+ countries also have a huge decline in local demand due to shuttered refinery capacity, curfews and lockdowns, which are destroying domestic demand.
- "If demand suddenly soars, supply may fail"
Dubai-based investment and strategy advice company Hormuz Straits Director Serkan Sahin said U.S. producers sold their oil inventories on a negative WTI price since halting production would be costlier.
Sahin said that this trend is likely to continue over the next months as oil demand worldwide has collapsed, and in the U.S. with the decline in oil exports, the country has become a closed system with no local buyers.
He also advised that there is nothing economic in sending oil to the U.S. from oil producers in Russia, northwestern Europe, North Africa, the Middle East, Kazakhstan and Azerbaijan.
“These countries could mitigate their problems if they can find markets to the east of the Atlantic," he said.
On the demand side, Sahin said some Asian countries like China, South Korea, Japan and India, are taking advantage of the weak price environment by importing and buying crude at low oil prices to store in their refineries.
"These purchases will recover some of the demand, but since demand for jet fuel will take some time to recover, the supply-demand imbalance will continue," he said.
The experts said if Brent oil continues to remain at around $10 per barrel for around six months, it would be more profitable for low-cost producers like Saudi Arabia to stop production and keep the oil underground.
"However, cutting oil production creates the likelihood of a rise in oil prices because it is easy to see an increase in demand [after coronavirus], but very difficult to bring back production to match demand. If demand suddenly soars, then supply may fail to meet it if it is not enough," he explained.
- "Bankruptcies likely to accelerate"
Kathy Hipple, a financial analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), said the OPEC+ oil production cut was insufficient to reduce the global glut of oil, and it will likely take many months, if not years, for the supply-demand issues to be resolved.
"Given the dramatic decline in demand for oil and gas, it is likely that prices will continue to fall. Production levels in March and April continued at higher levels than demand during these months, and must decline to achieve a supply-demand balance," she said.
Hipple said low WTI prices create high risks for exploration and production companies in the U.S., noting that the cash flow of fracking-focused companies has been negative for the last decade.
"These negative cash flows have naturally led to mounting bankruptcies in the sector. These bankruptcies are likely to accelerate massively this year with absent government intervention. Production cuts have been slow to materialize, but will start to occur with shut-ins and financial distress," she added.
By Ovunc Kutlu, Nuran Erkul Kaya