The global oil industry is experiencing a shock like no other in its history
The oil world has seen many shocks over the years, but none has hit the industry with quite the ferocity we are witnessing today. As markets, companies and entire economies reel from the effects of the global crisis caused by the coronavirus (COVID-19) pandemic, oil prices have crumbled. The impacts will be felt throughout oil’s global supply chains and ripple into other parts of the energy sector.
Pressure is coming from all sides: a precipitous decline in global oil demand as the pandemic has slashed fuel consumption, especially in the transport sector, aggravated by a supply shock due to the end of restraints on production from OPEC producers and Russia (OPEC+). The scale of the collapse in oil demand, in particular, is well in excess of the oil industry’s capacity to adjust.
With 3 billion people around the world under some form of lockdown because of the coronavirus, one of the traditional stabilisers for the oil market is missing. Low prices usually stimulate a reaction from consumers, but such a boost to demand is highly unlikely this time around, at least for the duration of the global health emergency. Instead, a rapid build-up of oil stocks is starting to saturate available storage capacity, pushing down prices further.
This is an unprecedented moment for those engaged in the business of supplying oil and those who rely on the associated revenue. In this article, we highlight five key dimensions of this crisis – themes that the IEA is tracking in detail in our Oil Market Report (whose next edition is on 15 April), the Global Energy and CO2 Status Report (later in April), the World Energy Investment report (late May), and many other publications.
At the moment, about 5 million barrels of oil produced worldwide each day is not fetching high enough prices to cover the costs of getting it out of the ground (based on Brent crude at USD 25 a barrel, with variations to reflect the prices typically available to producers around the world). These operations are now losing money on every barrel they produce.
The economics of getting oil out of the ground are not necessarily a good guide to which operations will actually halt production. Depending on how long they think the crisis will last, some of the more robust producers may continue pumping oil even if they are losing money. This could happen if the costs of shutting down production (and eventually starting it up again, if that proves possible) are higher than the operating losses from keeping the oil flowing. Moreover, some producers may opt to wait and see if weaker rivals go out of business, which would improve the environment for those who stay in the game.
However, there is now an additional, even more pervasive threat facing many producers, irrespective of their operating costs or strategies. As demand plummets, the entire supply chain of oil refining, freight, and storage is starting to seize up, making it increasingly difficult to push new supply into the system. Prices available to producers have fallen to single digits in Western Canada and there have even been incidences of negative pricing for some grades in parts of North America. For some producers, there could soon be no place for their oil to go.