Another cold snap on oil prices

Posted Apr 27, 2020, 8:13 a.m.Updated on Apr 27, 2020 at 12h33

Another day to forget for the black gold manufacturers. US barrels plunged again on Monday due to lingering concerns over storage capacity and weak demand linked to the Covid-19 pandemic, which claimed the lives of more than 200,000 people worldwide.

In the middle of the morning, the barrel of WTI, the American benchmark for crude oil, fell by almost 13%, falling back below the 15 dollar mark. A barrel of Brent from the North Sea, a benchmark on the international market, lost almost 3% to less than 21 dollars.

Storage problem

In recent weeks, prices have plummeted due to containment measures taken by states to fight the epidemic. As a result, automobile and air traffic, which consumes a lot of oil, has dropped dramatically, as has industrial activity. Last week, the WTI even ventured into negative territory in two sessions, before rebounding.

The current problem concerns storage facilities, particularly in the United States, which do not have the capacity to absorb excess oil. “We are on our way to reaching the limit of available capacity in a few weeks,” says Bjornar Tornhaugen, analyst at Rystad Energy. Prices cannot do anything but decline because producers will soon have nowhere to store their oil. The clock is ticking and we are approaching the final countdown if no further action is taken. ”

Reduction in production

These concerns have overshadowed the imminent reduction in production by some countries, including Kuwait and Algeria. In early April, the main oil-producing countries united within OPEC and their Russian-led allies agreed to cut production by around ten million barrels a day from May 1, which represents a reduction of around 10% in global supply. The agreement marked the end of the price war between Russia and Saudi Arabia.

It will be largely insufficient to compensate for the unprecedented fall in demand, estimated by Rystad at -27% in April and -20% in May. Over the whole of 2020, the planet’s oil consumption would drop by more than 10%.

The only solution to rebalance the market in the short term would be to reduce production in non-OPEC member countries. This is what is happening in Brazil, Canada and the United States, despite the significant loss that well closures represent for companies. Pending such unprecedented decisions, which are slow to show their concrete effects, the pressure on prices remains at its maximum.

The industry is now hoping that progress in the fight against the disease, such as plans to partially reopen several large economies, will bring markets back to normal in the coming weeks.