BREAKINGVIEWS-Oil storage crisis is new threat to OPEC - Reuters
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By George Hay
LONDON, March 25 (Reuters Breakingviews) - Oil prices are horribly low, but they could go lower still. Brent crude prices have dropped to $27 a barrel from $70 in January because Saudi Arabia and Russia are pumping as much as possible at the same time as the coronavirus is causing an unprecedented global slump in demand for crude. Soon there may be nowhere to store all the surplus oil.
There are 7.7 billion barrels of onshore storage capacity globally, according to analysts at Rystad Energy. Right now, more than three-quarters of that storage space is already being used, they say, which in theory leaves room to stockpile the equivalent of a little more than 1.7 billion barrels. But in practice, there’s less storage space than that available.
Storage tanks tend not to be filled above 85% of capacity, one oil expert told Breakingviews. That shrinks the available headroom relating to the 7.7 billion barrels of global capacity to around 600 million barrels. That’s much less than what is going to be needed. Rystad estimates supply could exceed demand to the tune of 15 million barrels a day in the second quarter, or more than 1.3 billion barrels, as huge consumers like India go into lockdown.
There is more floating storage available in the form of ships, but it probably won’t be enough to absorb the excess. Given new storage capacity takes months to build, the oil industry has two alternatives. Saudi Arabia and maybe even Russia could end their supply war and club together with the United States to try and restore some balance to the energy market. The Organization of the Petroleum Exporting Countries on March 20 invited an official from the Texas Railroad Commission, which regulates the biggest U.S. shale sector, to attend their June meeting. That suggests the idea isn’t impossible.
The other option is nastier. To stop oil being pumped when it can’t be stored, the price will have to fall far enough to make it sufficiently unprofitable for producers to continue activities. That may not happen until oil is below $20 a barrel. Suncor Energy SU.TO, a Canadian oil sands producer, has shut part of its oil sands operations even before the price gets there. Unless Saudi Arabia and Russia call a truce soon, this could be the canary in the coal mine.
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- Suncor Energy said on March 23 it would shut one of two so-called trains at its Fort Hills oil sands operations, because of low prices.
- Suncor said the move “will increase cash flow, particularly when bitumen prices are extremely low, as we are able to significantly reduce variable costs”.
- Some ports in India, including those owned by Adani Ports and Special Economic Zone, have declared force majeure after Asia's third-biggest economy announced a 21-day lockdown to prevent the spread of the coronavirus, Reuters reported on March 25.
- Declaration of force majeure, which allows buyers to suspend contracts because of changed circumstances, could delay discharge of crude vessels, an Indian refining source told Reuters.
- Brent crude futures were trading at $26.38 a barrel as of 1214 GMT on March 25.