Saturday, April 04, 2020

Unprecedented drop in oil demand

In CNBC, Natasha Turak reports in part,
...The U.S. shale patch also bears some of the highest production costs in the world, requiring a breakeven price of between $50 and $55 per barrel.

...Now, with Saudi Arabia and Russia’s planned production increases to battle for market share exacerbating the price crash brought on by the coronavirus pandemic, the sector faces what may well be a bloodbath: U.S. benchmark West Texas Intermediate is now trading at around $22 per barrel, down more than 60% year-to-date, and forecasters expect it to fall further.

This isn’t the first time shale has fallen victim to a Saudi-led price war. In 2014, when the kingdom and its OPEC allies refused to cut output amid falling prices in order to undermine shale and expand market share, more than 100 small independent shale companies in the U.S. were forced into receivership.

But the scale of today’s market shock — a global economy on lockdown amid a pandemic, prompting an estimated oil demand drop of as many as 20 million barrels a day in April and a projected 20% demand contraction this year — is unprecedented.

...A deal between OPEC and non-members led by Russia — known as OPEC+ — to cut oil production in order to stabilize prices collapsed in early March when Moscow refused to agree to Riyadh’s terms. This set off the dramatic U-turn in Saudi oil policy and an “each man for himself” race to pump more crude to more customers.

...“Crude oil inventories grew by a massive 13.8 million barrels,” Stephen Brennock of PVM wrote in a note this week. “The U.S. has not consumed so little gasoline for 26 years.”

Yet U.S. producers continue to pump at near-record highs, cranking out 13 million barrels per day last week, according to the Energy Information Agency. They’re now running up against fast-disappearing storage space and prompting calls in Texas for state regulatory action to curtail production, something that hasn’t been done in 50 years.

“Production shut-ins and another brutal wave of spending cuts are all but guaranteed,” said Brennock, amid the expectation that the U.S. will lose its top-producer spot to Saudi Arabia and possibly Russia this year. “This sharp pullback in U.S. upstream spending could see total oil production fall by 1 million bpd before the current year is out.”
Read more here.

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