The world oil market seems to be climbing out of the depths. Yet questions linger. And another crude oil price rout could be just around the corner.
The price of oil futures contracts could go to zero again, even faster than the May contracts fell, says CNBC’s Jim Cramer.
The oil glut is dominating the market narrative.
Twenty-eight tankers with Saudi oil, including 14 supertankers carrying a total of 43 million barrels, were set to arrive on the U.S. Gulf and West coasts before May 24, Rystad Energy reported.
“The total volumes booked to arrive are four times higher than the previous four-week average of imports from Saudi Arabia. Given the current storage situation and the level of congestion on U.S. coasts, we find it unlikely that all tankers will be able to unload upon arrival,” says Paola Rodriguez-Masiu of Rystad, an independent energy industry researcher.
The Saudi fleet would join the existing congestion of 76 tankers waiting to unload in U.S. ports. On the West Coast alone, 34 tankers were reportedly waiting last week to offload about 25 million barrels of crude. About 31 tankers, carrying a similar load, were waiting for a slot to unload on the Gulf Coast.
The tanker congestion has spiked in recent days because refiners are cancelling or deferring their purchases. If all the tankers unload their cargo, the U.S. production volume in May will almost offset the production reductions since March.
In the meantime, producing countries are striving to reduce output.
In a gesture of solidarity with other crude oil producers, Norway announced it would cut its output by 250,000 barrels per day (bpd) in June and by 134,000 bpd in the second half of 2020. U.S. output is down by more than 600,000 bpd. Canadian output is down by 300,000 bpd and Brazilian output is down by 200,000 bpd.
But this is far from enough to balance the markets. To restore calm, supply needs to come down even more sharply.
Questions about the state of the industry and the scale of demand destruction are only growing.
“There remains an exceptional level of uncertainty regarding the near-term outlook for prices and product demand,” said Brian Gilvary, the chief financial officer of BP.
Fatih Birol, executive director of the International Energy Agency (IEA) underlined just how significant the industry changes could be: “It is still too early to determine the longer-term impacts, but the energy industry that emerges from this crisis will be significantly different from the one that came before.”
Birol says IEA estimates show “Energy demand will fall six per cent in 2020 – seven times the decline after 2008 global financial crisis.”
A sense of urgency is creeping in. With tens of thousands of energy jobs in Republican-controlled states at risk, U.S. President Donald Trump says he will look at a proposal from Sen. Kevin Cramer calling on the White House to block Saudi Arabian oil shipments to the U.S.
“We cannot allow Saudi Arabia to flood the market, especially given our storage capacity dwindling. Right now, the highest number of Saudi oil tankers in years is on its way to our shores,” said Cramer, a Republican from North Dakota.
Russia is treading a cautious path. “You should not expect a jump in oil prices in the near term, due to the current oversupply on the market,” Energy Minister Alexander Novak wrote recently.
The market could begin to balance in the second half of this year, Novak wrote. He said demand is expected to recover with the easing of COVID-19 travel restrictions and reduction in supplies due to the output cut recently agreed to by OPEC-plus countries.
The Organization of Petroleum Exporting Countries continues to be optimistic. Oil prices are set to recover with the production cuts and gradual lifting of pandemic lockdowns around the world in the second half of 2020. When that happens, oil prices “will be $40 starting from the third quarter,” OPEC president Mohamed Arkab insisted last week.
That’s ambitious. A stable crude oil market is still a ways away.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.