Oil storage shortage fears expected to be realised

11931606484 e669bd8bf7 kSince oil prices crashed into negative territory earlier this week, Brent Crude prices have remained low at US$19.33 a barrel and WTI oil at US$10.01 a barrel at the time of writing

There has been further industry reaction as to what the price drop means for the industry as a whole, including the now-heavily pressurised storage sector.

Rystad Energy’s head of oil markets, Bjornar Tonhaugen said the storage shortage is real and the delayed reaction to it by the industry and created panic and suppressed Brent and WTI prices.

“In the past weeks, the market had OPEC+ and G20 meetings to hold onto, Tweets that would help enthusiasm spread and build hopes for a strong reaction to the crisis. Now traders have exhausted their ‘hope storage’ and have nothing else to count on,” said Mr Tonhaugen.

On the next OPEC+ meeting, scheduled for June, Mr Tonhaugen commented, “If further cuts in the group are to be announced and countries outside the alliance are not promising cuts to the extent the market expected so far. Shorting positions could come as a daily routine.”

Since mid-March there have been fears that storage capacity would run out of not enough supply is removed from the market.

“[It’s] time to throw old perceptions of physical laws to the side and be prepared for more surprises in this broken oil market. Prices can go to unprecedented low levels even for Brent as, unless there are further cuts announced, storage capacity will just not be enough. Unless there is a massive shock, like millions of bpd in new shut-ins or new production curbs that will handicap the oil supply tornado, or decisions by countries around the world to open up sooner and increase demand, don’t be surprised if a barrel of oil gets cheaper than a latte in a while,” Mr Tonhaugen concluded.

Moody’s managing director Steve Wood commented on the WTI price and its relationship to the May futures contract which stops trading tomorrow: “In a normal market, contracts typically roll over and are rarely settled physically but in this environment there is limited storage capacity so there is a mismatch between the “paper” market and the “physical” market. Once the May contract rolls off the June contract becomes the front month contract that is the most widely quoted. June is S US$21 and July is US$27, which shows that the May contract is the anomaly. Furthermore, the current Brent contract is the June contract and is down today at US$26 but not like the May WTI contract.”

Adrian Lara, a senior oil and gas analyst at GlobalData observed that crude production cuts in the US are too slow to support the low price, tipping that storage will run out by mid-May.

“Fundamentally there is little doubt US storage won’t be enough by late May-early June if crude oil production remains at the current rate, and refining capacity does not increase. With most of the country in lockdown until at least mid-May, staying at the current low levels of refining processing is the most likely scenario,” Mr Lara said. “In particular, storage in Cushing is expected to be filled up by end of May and this has already been pressuring the WTI spot price and then on top of it came the mismatch between the May futures contract and subsequent months.”

He concluded by forecasting that with no real certainty as to when the US lockdown will end or the economy will have a revived need to transport people and goods, “the downward pressure on WTI will continue during the next months.”

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