As demand for oil crashed amid the coronavirus outbreak, many traders seized the opportunity to store cheap oil stock to resell at a higher price. However, this scenario wasn’t an easy task for everyone.
The shipping costs increased sharply and storage facilities surpassed
the 90 per cent occupancy mark for the first time in five years. This
caused the West Texas Intermediate (WTI) delivery prices for May to
reach a historic negative value for the first time ever.
In other words, the delivery contract owner had to pay the receiver
of the oil shipment, as there was no storage facility available to
accommodate the incoming oil shipments.
The current outlook for the oil market nevertheless is gaining
positive momentum as global lockdowns are starting to ease up in the EU,
China and southeast Asia. These indicators should quickly reflect in a
negative manner on existing oil stockpiles, which will then increase
overall demand and driving prices upwards by July and August as
stockpiles head towards a 60-65 per cent occupancy.
Meanwhile, the implementation of the OPEC+ agreement of reducing 9.7
million barrels per day has served as a moderate market sedative. It has
managed to demonstrate the commitment of OPEC’s major producers – Saudi
Arabia, the UAE and Kuwait – towards a more balanced market. Their
adoption of a responsible approach is in the best interest of the oil
industry, their fellow OPEC members and allies.
Two weeks after the production agreement came into effect, the three
states pledged an additional combined cut of 1.18 million barrels per
day and raising the total amount contributed by OPEC+ to 10.88 mbd. This
drove Brent crude past the $30 mark for June shipment deliveries.
Sidelining shale
The production cut was not the only factor. The oversupply of crude
due to the shutdown of airports and the global scale of lockdowns
severely reduced demand for fuel, halted major industries which account
for most of the refined products’ consumption, and that in turn
reflected primarily on high-cost unconventional hydrocarbon producers.
The effect of oversupply has driven shale oil producers in the US,
Canada and other parts of the world to shut down their producing wells.
The smaller oil producers with a higher breakeven averages were also
forced to sell their assets at big discounts to larger corporations,
while others filed for bankruptcy, which resulted in a forced production
reduction unlike the voluntary approach by the OPEC majors.
By April, more than 41 smaller producers in the US filed for
bankruptcy as they could not sustain their output with the current
market situation and as debtors and shareholders lost faith in their
feasibility and competitiveness.
Meanwhile, the three largest oil producers in the GCC had announced
before the coronavirus outbreak, plans for more exploration and
production enhancement projects.
They have not been reducing their capital spending plans, even with
market conditions turning extremely fragile unlike international oil
companies (IOCs), which have been suffering much in the current crisis.
The cost of oil extraction is relatively less for the UAE, Saudi Arabia and Kuwait, where it is below the $16 per barrel mark.
Together, they account for a staggering 17.5 mbd of crude oil
production capacity that is unrivaled by any producer in the world. The
18 per cent of global market production capacity at the hands of the
three states have provided a strong negotiating advantage within OPEC.
Their level of coordination has proved to be very resilient through
decades of constructive cooperation for the best interests of OPEC as an
organization and the wider industry. Smaller producers do not enjoy
these competitive advantages.
The government support to national oil companies (NOCs) has earned
the three countries greater leverage and confidence in the global
markets, while other big players such as Occidental Petroleum struggle
with their $40 billion loan.
The NOCs in the Gulf enjoy a much stable cashflow position and have
secured ample reserves during times of higher oil trading prices. This
has encouraged larger consumers such as China and India to further turn
to GCC crude imports.
Given these conditions, the Gulf NOCs are anticipated to be the
biggest beneficiaries in regards to global marketshare as COVID-19
lockdowns ease.
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