Oil prices started the week on a lower note as storage levels increase and promised production cuts fail to meet what the market really needs.
Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, has provided the following market comment:
"It is only natural that prices are dropping this morning if we look at the market forces. And they will remain under downwards pressure until we see significant upstream shut-in volumes actually commence.
Neither an earlier start of production curtailments by Saudi Aramco and Kuwait Petroleum Corporation, nor a historically large 500 000 bpd monthly US oil production decline in May-June will remove enough oil supply to avoid filling the world’s crude storage during May. The market knows that the storage problem remains and we are on a calculated path to reach tank tops in weeks. Prices can’t do else but decline when producers won’t have where to store oil soon.
Intentions to help prices further, announced by many OPEC+ and non-OPEC countries, are not enough to alter the current situation. Actions are needed now as the problem stopped being theoretical and far away. The storage clock is ticking for producers and we are approaching the final countdown if no further action is taken.
Due to actual facility limitations among other reasons, we expect OPEC+ oil production to decline by around 5 million bpd month-on-month in May (not as much as the “nameplate” 9.7 million bpd number specified in the production agreement), as a result of both voluntary cuts and natural declines.
What is more interesting now is which producers both within and outside OPEC+ will be forced to shut-in production on top of these cuts to rebalance the market.
We believe producers in remote onshore locations with limited demand flexibility and storage capacity are likely candidates to have to reduce production soon. If global E&P companies are expecting OPEC+ to “save the day”, we may be in for a hard impact when we hit the storage wall.
The storage variable is now becoming a negative force in the price equation. The more it fills, the lower the prices will go until either more shut-ins or a demand rebound balance the situation. But the hot potato clearly has a name and it is called storage."
Read the article online at: https://www.oilfieldtechnology.com/special-reports/27042020/rystad-energy-oil-starts-the-week-on-a-low-note-as-storage-problem-looms/