The world’s oil market once fixated on how Saudi-led Opec would tweak supply in small increments to boost prices. That concern suddenly feels quaint: the size of the global drop in consumption triggered by the coronavirus pandemic may be equivalent to the cartel’s entire output. Saudi Arabia has pledged to ramp up exports as part of its price war, but the collapse in demand will compel other producers both within and outside Opec’s 13 members, to leave lossmaking supplies in the ground.
Demand is now down by as much as a quarter, or roughly 25m barrels a day. That is close to what Opec countries produce every day, or as if the US, Mexico and Canada had abruptly stopped consuming oil altogether. Storage facilities will soon be overwhelmed, say analysts, unless the industry can find a way to cut output at a scale never managed before.
On Sunday evening the price of West Texas Intermediate, the US benchmark, slid below $20 a barrel to an 18-year low, about 70 per cent less than at the start of the year. Several forecasters see single-digit prices on the horizon as pipes and tanks fill up.
“When you predict a surplus of more than 20m barrels a day we will hit infrastructure problems quickly,” said Mathios Rigas, head of Energean, a European energy producer. “With oil prices below $20, we’re going to see a lot of shutdowns.”
While some producers will go bust, stronger ones will decide whether to take more drastic and potentially costly action: shutting wells that now run at a loss, risking damage to the reservoir.
Others will stop short of that, but may scale back output. That could help conventional oil wells in the long run, allowing pressure to recover.