Abu Dhabi: Oil markets on Friday closed with yet another weekly loss, with Brent on $21.44 and West Texas Intermediate (WTI) at $16.94. The American benchmark saw its prices fall into negative territory last week for the first time in its history, highlighting the oil market’s current predicament.
“Prices could again test sub-zero levels if the supply/demand fundamentals stay poor, speculative market positioning in front month futures remains concentrated in a few participants and time spreads - a reflection of the cost of storage - endure at wide levels,” said Edward Bell, commodity analyst at Emirates NBD.
“We aren’t optimistic that demand will improve suddenly over the next few months even as some economies experiment with ending their lockdowns while supply adjustments from Opec+ are now starting in earnest,” he added.
Shale hit hardest
“The wholesale collapse in US oil pricing is having an immediate impact on production: output has fallen by 900k barrels per day between March 13 and April 17. The outlook remains dire as well. E&P companies took another 60 rigs out of service last week, bringing the total down below 400,” bell explained.
“The recovery cycle may thus be extremely long for US oil producers and it is challenging to find any signs when—or even if—it will indeed begin,” he added.
Running out of storage
Ole Hansen, head of commodity strategy at Saxo Bank, said that storage facilities reaching full capacity for excess oil was the biggest challenge oil markets were currently faced with.
“In the event of storage facilities hitting tank tops, oil producers can only produce what they can sell. The risk of that happening is now the biggest challenge facing the industry. Such an event could force the shut-ins of millions of barrels per day and ultimately lead to bankruptcies and a sovereign debt crisis.
“Oil producers have been caught off-guard and have struggled to respond with corresponding production cuts… Global lockdowns have slowly begun to be get lifted but the process of returning to previous demand levels could take many months,” he added.
“Weeks not months, however, is the time it will currently take before global storage facilities hit tank tops. One area which has already reached full capacity are the storage facilities located in and around Cushing, Oklahoma,” he said,
Production cuts by Opec+ of close to 10 million barrels per day (bpd) is also set to kick in this week, as the body of oil producing nations look to mitigate the supply glut and fall prices. The International Energy Agency has forecasted oil demand to fall by as much as 26 million bpd during May in the face of continued land and air travel restrictions.