Oil demand is set to plunge by as much as 27 million barrels per day (mb/d) in April, a decline larger than anything that has occurred in the history of oil.
The decline in demand could cause inventories to fill up, enforcing substantial curtailments by refineries and shut ins at oil wells, according to a new report from Rystad Energy. The hit to demand will “last longer” than previously expected, as more countries impose lockdown orders while “the spread of the virus will resist restrictions more than we first expected,” the firm said. Rystad sees a demand hit of around 20 mb/d in May and more than 15 mb/d in June. Demand growth remains negative for the duration of 2020.
New data from India shows that oil demand has plunged by 70 percent as the country has gone into lockdown.
Meanwhile, in the U.S., gasoline demand fell to 5 mb/d in the U.S. for the week ending on April 3, down from 9.6 mb/d three weeks earlier.
The collapse of demand and prices has quickly translated into supply cuts. Refining runs fell to 13.63 mb/d on April 3, down 2.2 mb/d in two weeks. Crude oil inventories jumped. Despite the sharp cuts at refineries, gasoline stocks also spiked by more than 10 million barrels. Staggering figures all around.
The sudden stop of demand filters back to the wellhead. EIA data shows that U.S. oil production fell 600,000 bpd for the week ending on April 3, “potentially heralding a faster-than-expected price response,” as JBC Energy interpreted the data in a note.
Prices that oil drillers are getting behind the pipeline – that is, not the broader WTI benchmark, but what they may receive in West Texas or North Dakota – have fallen much more sharply than WTI or Brent. Midland discounts have widened to around $6 per barrel below WTI, according to Morgan Stanley. Bakken oil is now fetching prices as low as $14 per barrel.
Pipelines are clogged with oil, so drillers have nowhere to sell. “In response to low prices and potential loss of flow assurance, we expect producers will begin to shut-in currently producing wells over the coming weeks,” Morgan Stanley wrote in a note. “Legacy production from older wells appears most at risk, where we expect costs are higher than these basin averages.”
A lot of hope from the U.S. industry has been pinned on OPEC+ cuts. At the time of this writing, an OPEC+ deal was coming together, with reports suggesting somewhere around 10 mb/d, although the exact duration and terms of the cuts remains unclear.
Regardless, output declines – top-down mandated or not – are in the offing. Several analysts say that even a historic OPEC+ cut won’t be enough. “At best, the production cuts that are being considered could somewhat soften the blow of this slump in demand,” Commerzbank wrote on Thursday. “Thus the oil price faces considerable downside risks following today’s video conference.”
In a separate report, Goldman Sachs said that even if OPEC+ manages to cobble together 10 mb/d of cuts, another 4 mb/d of “cuts” from market-induced shut-ins are likely. As a result, while there could be a short price rally from the announcement from OPEC+, “this support will soon give way to lower prices with downside risk to our near-term WTI $20/bbl forecast,” Goldman said. “Ultimately, the size of the demand shock is simply too large for a coordinated supply cut, setting the stage for a severe rebalancing.”
In a sign of the times, Continental Resources said on Tuesday that it would suspend its dividend and also curtail its own supply by 30 percent for April and May. Parsley Energy said it would shut down 400 wells in the Permian.
“While any potential cuts from Thursday’s OPEC+ meeting would be positive, we do not expect a deal large enough to ‘fix’ near-term oversupply given the sheer magnitude of lost demand from the Covid-19 pandemic,” analysts with Morgan Stanley said. “[W]e continue to see further oil production shut-ins and curtailments as likely with or without coordinated supply cuts.”