Spot oil prices have plunged again, dropping to their lowest level in almost 17 years. For the first time in history, the market is experiencing a simultaneous shock in supply and demand, which leads to bleak prospects for the key goal of central banks’ policy – consumer inflation. Goldman hastily updated its Brent forecast to $20 per barrel for the second quarter of this year, citing “secondary effects of the Covid-19 outbreak that create scenarios that far exceed our negative views”, forecasting a gigantic market surplus of 7 million bpd.

The price war has already borne its initial fruits for its main participants – Saudi Arabia and Russia. If the broad S&P 500 index fell by 15.3% since the beginning of March, then the sub-index of E&P companies over the same time interval was almost half:

But how low can prices go?

It’s a tough question but it’s reasonable to believe that in the free market environment; supply should decline as price declines below the costs for each individual producer, until the surplus is minimal. As for the US barrels, the progress in reaching the break-even point accelerates due to the explosive growth of tanker charter rates, i.e. cost of transportation to end consumers. Saudi Arabia’s demand for tankers has grown significantly along with its intentions to increase production to 12 million barrels first. In addition, the “good old” oil traders who want to benefit from the contango market have also stepped up – buying oil on the spot market, placing it in storage in the chartered tanker, sell futures and thus lock profit. The spread between the spot market and 12-month Brent futures rose from tens of cents to $11, creating substantial demand for offshore oil storage:

It follows that US shale drillers will likely reduce oil exports significantly (which now amounts to approximately 4 million bpd) and, subject to a planned reduction in production combined with selling oil via futures, will have to send oil for storage to Cushing. The problem is that the storage is limited. Subject to filling with a rate of 2 million b/d, the storage will be filled in about 10 weeks.

Trump also announced filling of strategic storage oil reserve, which can additionally take just … 77 million barrels.

Given a maximum filling rate of 430K barrels, government demand will last for about 6 months. There is nowhere to wait for help for US oil producers.

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