IHS Markit expects up to 10 MMb/d of world oil production will be cut or shut-in from April to June 2020 as oil storage fills up and output from financially strapped companies begins to fall. If oil cannot be sold or stored, it cannot be produced. Transportation constraints and lack of access to every available tank will prevent the utmost level of storage capacity being reached. As Jim Burkhard, IHS’s vice president and head of oil markets, puts it: “If there is no international agreement to curtail oil production then brutal unadulterated market forces will bring the oil market into balance. The laws of supply and demand are fierce in extreme conditions.”
Oil demand in the second quarter of 2020 is projected to be 16.4 MMb/d less than a year ago, with a decline in April of around 20 Mmb/d. Demand is collapsing because of the closure of a large share of the global economy because of coronavirus disease 2019 (COVID-19).
With the global economy already in crisis, a hammer blow could fall in the next two months if, as seems likely without immediate action, more surplus oil floods the marketplace than at any time in history.
The market-share battle is between Saudi Arabia and Russia. The conflict could always be ended by a phone call among the principals, but given their entrenched positions, stopping the price war and easing the market turmoil may well require collaboration through some broader framework, such as the Group of 20. That would permit a discussion going beyond the present Russia-Saudi impasse, bringing in the United States and a larger group of producers and consumers, including Brazil, China, France, Germany, Mexico and the United Kingdom.
As it happens, the Saudis are chairing the G-20 this year, and are eager to make their stewardship a success. To that end, they have called for the group’s coordination in dealing with the pandemic. Similar work together is essential to heading off the economic damage from an unprecedented oversupply of oil.
