We warned last week that oil has a storage problem, which could translate to permanent production capacity shutdowns. On Thursday, Goldman’s commodities research team, headed by Damien Courvalin, offered some further insight into the issue and the inflationary pressures that are likely to come about as a result. Here are the key pars from their report, with our emphasis:
Global isolation measures are leading to an unprecedented collapse in oil demand which we now forecast will fall by 10.5 mb/d in March and by 18.7 mb/d in April (our 2020 yoy demand forecast is now -4.25 mb/d). A demand shock of this magnitude will overwhelm any supply response including any potential core OPEC output freeze or cut.
Such a collapse in demand will be an unprecedented shock for the global refining system with margins simply not low enough given the required level of run cuts. Product storage saturation at refineries is therefore set to occur over the next several weeks. At that point, the product surplus will become a crude one and we expect its unprecedented velocity will create similar logistical crude storage constraints. This is the point at which crude prices will fall below cash costs to reflect producers having to shut-in production. While seaborne crudes like Brent can remain near $20/bbl in 2Q, many inland crude benchmarks where saturation will prove binding are likely to fall much further (US, Canada, Russia, China).
The scale of the demand collapse will require a large amount of production to be shut-in, of potential several million barrels per day. Such a hit on production will not be reversed quickly, however, as shutting-in can often permanently damage reservoirs and conventional producing wells.
We therefore increasingly see risks that the rebound in prices will be much sharper than our base-case rally back to $40/bbl Brent by 4Q20, with a normalization in activity increasingly likely to be accompanied by a large inflationary oil shock.