Given sagging demand, the growing scarcity of oil storage and declining production from financially strapped upstream firms, IHS Markit predicts that up to 10 million barrels per day (bpd) of world oil production will be cut or shut-in until June of this year.
That would equate to nearly 10 percent of total daily global oil output for 2019, based on the U.S. Energy Information Administration’s reported 100.6 million-bpd figure for the year.
“If oil cannot be sold or stored, it cannot be produced,” IHS Markit stated Tuesday in a written statement emailed to Rigzone. “Transportation constraints and lack of access to every available tank will prevent the utmost maximum level of storage capacity being reached.”
IHS Markit also reported that it anticipates oil demand in the second quarter of 2020 to be 16.4 million bpd lower than the year-ago level, with a projected April decline of approximately 20 million bpd. As oil storage facilities near capacity, the supply surplus cannot exceed the practical limit of 1.2 billion barrels of capacity that was available as of early First Quarter 2020, the information services firm pointed out.
To put the estimated 16.4 million-bpd oil second-quarter oil demand decrease year-on-year into perspective, IHS Markit Vice President Aaron Brady noted that it is more than six times greater than the “record drop” that occurred in the first quarter of 2009 during the Great Recession.
“Quite simply, global production has been on a pace to exceed available storage capacity,” remarked Jim Burkhard, IHS Markit’s vice president and head of oil markets. “Something has to give. And it will. Signs point to a forced 10 million barrels per day cut in world oil production.”
When might the volume of forced shut-in oil production begin to abate? IHS Markit’s currently assumes that it will start to ease in approximately the middle of this year. In the meantime, the company predicts that every region worldwide will experience an oil production decline during the second quarter – with OPEC member countries, Russia and the United States among the hardest-hit in terms of volume.
IHS Markit cautioned that its outlook presumes that a discussion will occur among international players to restrain oil output but that no deal will materialize. The firm added that some local or regional governments may still act on their own accord to address production and storage challenges. It cited the production curbs that the Canadian province of Alberta instituted in late-2018 as a potential model for combating low prices and storage constraints.
“If there is no international agreement to curtail oil production then brutal unadulterated market forces will bring the oil market into balance,” stated Burkhard. “The laws of supply and demand are fierce in extreme conditions.”
Following the “extreme, light-speed rebalancing of the oil market” that is underway, significant changes in some countries’ production levels should emerge – particularly next year if oil demand returns to a growth mode, IHS Markit contends. In that scenario, the firm anticipates U.S. crude production will be approximately 8.8 million bpd by the fourth quarter of 2021 – nearly 32 percent lower than the figure for the first quarter of 2020. Also, it foresees a much less dramatic impact to Saudi and Russian output in that time frame. The company stated that, compared to the first quarter of this year, Saudi output should be 1.8 million bpd higher and Russian output “just slightly lower” by the final quarter of 2021.
“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,” IHS Markit Executive Director Bhushan Bahree explained. “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.”
To contact the author, email mveazey@rigzone.com.
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