IHS Markit sees forced oil production cuts of 10MMbpd ahead

3/31/2020

WASHINGTON – Research firm IHS Markit expects up to 10 MMbpd 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 maximum level of storage capacity being reached.

 “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,” Jim Burkhard, IHS Markit’s vice president and head of oil markets, said in an email.

IHS Markit projects Oil demand in the second quarter of 2020 to be 16.4 MMbpd less than a year ago, with a decline in April of around 20 MMbpd. The oil surplus—the amount of production in excess of demand—will soon fill storage tanks around the world. The company’s global oil production outlook has been revised to reflect practical limits to crude oil storage capacity. The supply surplus cannot exceed the practical upper limit of 1.2 Bbbl of global crude oil storage capacity that was available as of early first quarter 2020. Storage limitations point to a forced 10 MMbpd cut in world oil production. Under current assumptions, the volume of forced shut-in production will begin to ease around mid-year.

“Quite simply, global production has been on a pace to exceed available storage capacity. Something has to give. And it will. Signs point to a forced 10 million barrels per day cut in world oil production,” Burkhard said.

Second quarter 2020 oil production is projected to decline in every region of the world, with OPEC members, Russia, and the United States among the hardest hit in volume terms because of the large size of their production base. While key global benchmarks Brent and WTI were trading on the futures market in the $20s on 27 March, West Texas Light at Midland sold for $9.40/bbl on the physical market. And Canadian heavy crude oil sold for less than $6/bbl. IHS Markit projects Brent prices to fall to around $10/bbl in April. Some producers may experience “negative prices” where they pay a buyer to take their crude oil.

 “Under current conditions second quarter global demand for oil is expected to be 16.4 million barrels per day less than a year ago.   That is more than six times the record drop experienced during first quarter 2009 during the Great Recession. In April the drop will be even bigger,” said Aaron Brady, vice president, IHS Markit.

The outlook assumes discussion but that no actual international agreement to restrain production materializes. IHS Markit expects that some local or regional governments may act within their means to address the production and storage difficulties as logistical constraints threaten the viability of companies and employment. Some may look to what the Canadian province of Alberta did in late 2018 when it instituted production curtailments due to low local prices and storage constraints.

The aftermath of the extreme, light-speed rebalancing of the oil market will result in significant changes in some countries production levels, especially in 2021. Assuming global oil demand returns to growth in 2021 Saudi Arabia and Russia are better positioned to maintain or even increase production compared to the United States. By fourth quarter 2021 we estimate U.S. crude oil production will be 8.8 MMbpd—down 4.1 MMbpd from first quarter 2020 production. In contrast, output from Saudi Arabia is projected to be 1.8 MMbpd higher with Russian production just slightly lower relative to first quarter 2020.

“Saudi Arabia and Russia are better positioned in a low-price environment to maintain or even increase production over the next two years compared to the United States. Their systems depend on conventional production, which has much lower decline rates compared to U.S. tight oil. A decline in upstream investment will impact short-term production capacity to a much lesser degree than in the United States,” said Bhushan Bahree, executive director, IHS Markit.

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