The next chapter of the oil crisis: the industry closes

Negative oil prices, ships sailing at sea with unwanted cargo, and traders get creative about where to store oil. The next chapter of the oil crisis is now inevitable: large sectors of the oil industry are about to begin to close.

The economic impact of the coronavirus has devastated the oil industry in dramatic phases. First, it destroyed demand when factory closings closed factories and kept drivers at home. Then the storage started to fill up and traders turned to ocean tankers to store crude oil in hopes of better prices ahead.

Shipping prices are now rising to stratospheric levels as the industry runs out of tankers, a sign of how distorted the market has become.

The specter of production closings, and the impact they will have on jobs, businesses, their banks, and local economies, was one reason that prompted world leaders to join forces to reduce production in an orderly manner. But as the scale of the crisis dwarfed their efforts, by not stopping the drop in prices below zero last week, the closings are now a reality. It is the worst case scenario for producers and refineries.

“We are moving towards the end of the game,” Torbjorn Tornqvist, head of commodity trading giant Gunvor Group Ltd., said in an interview. “From early to mid-May it could be the peak. We are weeks, not months, far from that ”.

Read more: The 20 minutes that broke the US oil market. USA

In theory, the first cuts in oil production should have come from the OPEC + alliance, which earlier this month agreed to cut production from May 1. However, after the catastrophic drop in prices on Monday, when West Texas Intermediate fell to – $ 40 per barrel, it is the US Shale Patch. USA Who leads.

The best indicator of how the US industry is reacting is the rapid drop in the number of oil rigs in operation, which last week fell to a four-year low. Before the coronavirus crisis hit, oil companies managed around 650 rigs in the US. USA By Friday, more than 40% of them had stopped working, and only 378 remained.

“Monday really focused people’s minds that production needs to decrease,” said Ben Luckock, co-director of oil trading at commodity trader Trafigura Group. “It is the blow to the face that the market needed to realize that this is serious.”

Trafigura, one of the largest US crude oil exporters in the Gulf of Mexico, believes that production in Texas, New Mexico, North Dakota and other states will now drop much faster than expected as companies react to negative prices, that have persisted for several years. days last week in the physical market.

Until prices collapsed on Monday, the consensus was that production would drop by about 1.5 million barrels per day in December. Market watchers now see that loss in late June. “The severity of the price pressure is likely to act as a catalyst for immediate activity slowdown and closings,” said Roger Diwan, an oil analyst at the consulting firm IHS Markit Ltd.

The price shock has been particularly intense in the physical market: crude oil producers like South Texas Sour and Eastern Kansas Common had to pay more than $ 50 a barrel to offload their production last week. ConocoPhillips and shale producer Continental Resources Inc. have announced plans to close production. Regulators in Oklahoma voted to allow oil drillers to close wells without losing leases; New Mexico made a similar decision.

North Dakota, which for years was synonymous with the US shale revolution. USA, is witnessing a rapid decline. Oil producers have already closed more than 6,000 wells, reducing approximately 405,000 barrels per day in production, or about 30% of the state total.

Production cuts will not be limited to the US. USA From Chad, a poor, landlocked country in Africa, to Vietnam and Brazil, producers are now cutting production or making plans to do so.

“I would not like to feel about it, but yes, clearly there must be a risk of confinements,” Mitch Flegg, head of the North Sea oil company, Serica Energy, said in an interview. “In certain parts of the world it is a real and present risk.”

At emergency board meetings last week, small and large oil companies discussed a prospect that is the bleakest any oil executive has ever seen. For small businesses, the next few weeks will be about staying afloat. But even for the biggest ones, like Exxon Mobil Corp. and BP Plc, it’s challenging. Big Oil will offer insight into the crisis when companies report earnings this week.

Saudi Arabia, Russia and the rest of the OPEC + alliance will join the production cuts on Friday, reducing their production by more than 20%, or 9.7 million barrels per day. Saudi Aramco, the state-owned company, is already cutting back to meet the target. And Russian oil companies have announced that exports of their Urals flagship crude would drop to a 10-year low in May.

Still, it may not be enough. Every week, 50 million barrels of crude oil are stored, enough to feed Germany, France, Italy, Spain and the United Kingdom combined. At that rate, the world will run out of storage in June. What is not stored on land is stored in tank trucks. The US Coast Guard USA He said on Friday that there were so many tankers anchored off California that he was awaiting the situation.

Before the crisis hit, the world consumed around 100 million barrels per day. However, current demand ranges from 65 to 70 million barrels. So in the worst case, about a third of global production must be shut down.

The reality is likely to be less severe as storage will continue to bridge the gap between supply and demand. Also, oil traders say consumption has probably bottomed out and a very smooth recovery will begin.

Closed refiners

But before that happens, the big shutdown will also extend through oil refining.

Over the past week, Marathon Petroleum Corp., one of the largest US refineries. The US announced that it would stop production at a plant near San Francisco. Royal Dutch Shell Plc has shutdown several units at three US refineries in Alabama and Louisiana. And in Europe and Asia, many refineries run halfway. US oil refineries USA They processed just 12.45 million barrels per day during the week to April 17, the lowest amount in at least 30 years, except for hurricane-related closings.

More refinery closings are coming, oil traders and consultants said, particularly in the US. USA, where closings started later than in Europe and demand is still contracting. Steve Sawyer, director of refining for Facts Global Energy, said global refineries could shutdown up to 25% of total capacity in May.

“No one will be able to dodge this bullet.”