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© Reuters. By Alex Lawler and Ahmad Ghaddar
LONDON (Reuters) – Whether or not OPEC + oil producers formally agree to reduce additional oil production, quickly filling up storage capacity and reducing demand due to the coronavirus crisis may compel them to cut further.
With the collapse of crude oil consumption, the Organization of the Petroleum Exporting Countries, Russia and other producers, a group known as OPEC +, will implement an agreement to reduce supply by a record 9.7 million barrels per day (bpd) from May 1.
But that unprecedented deal to withdraw around 10% of global supply already seems inadequate when demand has plummeted by as much as 30% and the world is possibly only weeks away from running out of storage space for the surplus.
Vopak, the world’s largest independent storage company, said Tuesday that its tanks were nearly full.
The tanks at Cushing, the delivery point for the futures contract, will be full in a few weeks, analysts say.
“We have to reduce … with or without an OPEC production reduction agreement,” Mele Kyari, head of Nigeria’s state-owned oil company NNPC Group, told the African nation’s Premium Times newspaper.
He said Nigeria would have to cut production because it was difficult to find a place to put oil.
An OPEC source told Reuters that it was “logical” to expect the market to impose further cuts on OPEC + producers.
Up to 17 million bpd could be taken off the market this spring, estimated Jim Burkhard of IHS Markit, a research company, due to production cuts and other closings.
Energy Aspects expects the impending closings in the United States to reach at least 1.3 million bpd, in addition to the cuts already announced by the United States this month when OPEC + was working on its deal.
‘UNEXPLORED TERRITORY’
“Deep contango will now force oil producers to reduce production immediately, financially and logistically,” wrote Energy Aspects, referring to a market structure where spot prices are lower than oil prices delivered in a later date, which generally encourages storage unless there is no space.
The consultant forecasts that US production. USA It will decrease by 710,000 bpd year-over-year in 2020.
“We are in unknown territory. Anything is possible, even the incredible,” said an OPEC + source on whether the group members could be forced to make even deeper cuts.
Rystad Energy analyst Christopher Page estimated that around 400 million barrels of crude storage capacity were available, much of it in the United States, while inventories increased at a rate of 26.5 million bpd in April.
If that rate is maintained, it could deplete global storage capacity in just over two weeks.
“While OPEC cuts will help, they are limited, and the picture of global storage availability now looks bleak for June,” Page said.
Meanwhile, OPEC is already looking at new steps, less than two weeks after forging its latest deal.
Saudi Arabia said on Tuesday it was ready to take further steps along with OPEC + allies and other oil producers, and Iraq echoed that position, although Russia was more cautious.
But there are already signs that producers around the world are being forced to take action for economic reasons. EnQuest (ENQ.L) became the first British producer to close fields in the North Sea last month as a result of falling prices.
“Once all available storage capacity is used, physical closures will be required to balance the market,” Redburn Energy said in a report. “This may have to happen quickly.”
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