The oil world has seen many shocks over the years, but none has hit the industry with quite the ferocity being witnessing today, according to a recent report by the International Energy Agency (IEA) on Thursday.
“The impacts will be felt throughout oil’s global supply chains and ripple into other parts of the energy sector,” IEA explained and added that pressure is coming from all sides.
During the OPEC+ conference in Vienna on March 6, Saudi Arabia and Russia failed to make deeper cuts into the group's oil production levels to mitigate the adverse impact of coronavirus on weakening global oil demand.
After the conference, both countries announced the following week they would boost up their crude oil output starting from April, triggering a war for greater market share, but this had sent crude prices to their lowest levels since 2002.
Moscow and Riyadh cut their oil production levels three times since December 2016 during their OPEC+ alliance, to balance the global oil market against rising U.S. shale oil production and support crude prices.
The agency said as nearly 3 billion people around the world have been under some form of lockdown due to the pandemic, “one of the traditional stabilizers for the oil market is missing” and the low prices are no more a stimulant for the consumers, which causes available storage capacity to saturate pushing down prices further.
- Some existing production to come to a halt
Roughly 5 million barrels of oil extracted worldwide every day are not attracting enough high prices to offset the expense of taking it out of the field, which makes these operations lose money for every barrel they make, the agency said.
IEA said some oil producers may continue pumping oil even if they are losing money because a) the costs of shutting down production are higher, or b) they wait for weaker rivals to go out of business.
However, the agency said, for some producers, whatever their plan is, there could soon be no place for their oil to go.
- Knock-on effect of sharp cuts in new investments on all supply chain
Oil producers have responded to the market crash by proposing major reductions in their current development budgets, IEA said.
These cutbacks are especially high among some independent US companies and shale producers, many of whom were already facing intense investor demands to reinforce business models and boost cash flow before the recent market crash, it added.
Changes in oil markets ripple across all parts of the energy sector, the agency said, highlighting natural gas “because of the links between oil and gas prices that remain in many long-term gas supply contracts.”
Although the exact consequences would vary from company to company, $25 a barrel will leave some international gas producers unable to pay their running costs and the weak gas spot market will not provide much relief, the international energy agency said.
Gas demand is less exposed to the immediate effects of the current crisis than oil demand because of its relatively limited use for transport, however, the lockdowns and the economic slowdown will affect industrial and power demand for gas, it added.
“Suppliers with the highest short-term costs of production and those who rely on spot sales are among the most vulnerable.”
By Sibel Morrow