From bad to worse, a crude escalation

Updated March 29, 2020

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Despite hints from Washington, Saudi Ara­bia is insisting it is not in discussion with Russia on the issue, both Riyadh and Moscow appear in for a long haul.  — AFP/File
Despite hints from Washington, Saudi Ara­bia is insisting it is not in discussion with Russia on the issue, both Riyadh and Moscow appear in for a long haul. — AFP/File

‘Crude’ pain is now acute.

With only a few days to go, before Saudi Arabia and Russia begin pumping an estimated extra 2.5 million barrels per day (bpd), global crude markets are on the verge of one of the biggest oil supply gluts the world has ever seen.

The horizon is nothing, but bleak. Despite hints from Washington, Saudi Ara­bia is insisting it is not in discussion with Russia on the issue, both Riyadh and Moscow appear in for a long haul.

With demand and supply shock acting simultaneously, crude markets are literally imploding. The global demand could plummet by some 20m bpd, says Fatih Birol, the Executive Director of the International Energy Agency.

The global oil demand is in freefall. “Today 3 billion people in the world are locked down. As a result of that, we may see demand fall” by as much as 20million bpd, Birol said at an online event hosted by the Atlantic Council on Thursday.

The market is being hit on an unprecedented scale by a combination of demand destruction and a supply surge following the breakdown of Saudi Arabia and Russia’s partnership. This is filling up inventories quickly, he added, emphasising oil storages may become full “very soon.”

As per Goldman Sachs, global oil demand could plummet by 18.7m bpd in April, deepening an expected demand plunge of 10.5m bpd for March.

“A demand shock of this magnitude will overwhelm any supply response including any potential core Organisation of the Petro­leum Exporting Countries output freeze or cut,” Goldman Sachs said in a note carried by Reuters.

The view is echoed by the world’s largest independent oil trader, Vitol, underlining oil demand could slump by 15m to 20m bpd over the next few weeks.

Vitol CEO Russell Hardy underlined the consumption of crude has dropped by between 15m and 20m bpd, and on an annual basis, it will be lower by at least 5m a day this year.

In the wake of reports that the US is pressuring Saudi Arabia to avoid flooding the market as oil demand is cratering, ING strategists Warren Patter­son and Wenyu Yao continued to be pessimistic, saying on Thursday: “The issue for the oil market is that even if we do see some restraint from the Saudis, the world is still set to see a significant oil surplus over 2Q20, given the demand hit we are currently seeing.”

“We’ve never seen something like this before,” Mike Hiley, president of OTC Futures was quoted as saying.

“Oil is going to continue to be stuck in this rut given the simultaneous supply and demand shocks.

Adding another ripple to the global oversupply pool of global liquids, the UK operator INEOS has decided to postpone its scheduled maintenance for the North Sea Forties pipeline system (FPS). Rystad Energy estimates this move would add several hundred thousand extra barrels to the market every day.

Markets have collapsed by almost 60 per cent. But it is just the tip of the iceberg, says Bloomberg in one of its reports.

The price rout is far deeper for actual cargoes, which are changing hands at large and widening discounts to the global benchmarks. The discounts mean that in the physical market, some crude streams are trading at $15, $10 and even as little as less than $5 a ­barrel.

Nigeria, the biggest oil producer in Africa is selling its flagship Qua Iboe crude at a discount of $3.10 a barrel below the Dated Brent benchmark, the largest in at least two decades.

Colombia is selling its Vasconia crude at a discount of $7.75 a barrel to Brent, a 4 1/2-year low. “The physical oil market looks horrific,” said Kit Haines, an analyst at consultant Energy Aspects Ltd, the Bloomberg reported.

The price of Western Canada Select, the domestic heavy oil benchmark followed up a brutal 30pc plunge on Thursday with another 28pc fall on Friday to reach $4.58 per barrel — just a fraction of other price benchmarks.

In central Montana, oil traded near $8 last week, having been above $30 at the start of the month. Central Asian crude CPC Blend, reportedly changed hands at an 8-year low earlier this month.

Even Saudi Arabia is suffering. With record discounts to European refiners, state-owned Saudi Aramco is set to sell its flagship Arab Light at around $15 a barrel in Rotterdam by the beginning of April if the benchmark Brent holds at current levels, Bloomberg added.

This is unprecedented and is set to get worse.

Published in Dawn, March 29th, 2020