From agreement signed by the main crude oil producers Globally, the extraction of this energy source will also be reduced during 2020. From May, production will be cut by 9.7 million barrels per day, an action that aims to help recover oil prices, as well as deplete a part of the accumulated reserves in recent weeks.
The International Energy Agency (IEA) estimates that, since March, there is an oversupply in the global market which ranges between 10 and 20 million barrels. This factor is key to explain that there are more and more problems to continue storing these reserves.
The WTI case
The fall in US benchmark crude oil prices (the West Texas Intermediate —WTI— it was quoted at -37.63 dollars per barrel on April 20) is partly explained by the fact that most countries are about to reach their limit in oil storage capacity.
Fausto Álvarez, ex-head of the Technical Administration Unit of Assignments and Contracts of the National Hydrocarbons Commission (CNH), elaborated on an interview with Sputnik on this subject.
“In Cushing, Oklahoma, it is said that storage had already reached 75% capacity and it is said that this storage increases at a rate of 5 million barrels per week. That means that it has the capacity to store another 16 million barrels, but at this rate this would be accomplished in three weeks. This explains the impact on the price of West Texas, combined with the expiration of the futures contracts in May, “he shared.
The United States Energy Information Agency (EIA) states that the Cushing deposits have a capacity of 80 million barrels, which represents 10% of the total storage available to the United States. The proximity to reach its limit, together with the drop in the consumption of hydrocarbons worldwide, are part of the threats that will affect the value of oil in the following months.
However, negative WTI prices only affected speculators in possession of oil delivery contracts scheduled for May. This phenomenon shed light on the problem of storage saturation that the hydrocarbon industry will have to face in the following months, said Juan Arellanes, professor of geopolitics at the Faculty of Global Studies at the Universidad Anáhuac México.
“In perspective, during the worst moment of the 2008 crisis the biggest drop in demand was 4%, which did a lot of damage. Today, the drop is 25% compared to last year, but it is very likely that end up being up to 30%. The fall in demand is linked to the fall in price, especially for storage. Because it is expected that if the rhythm of production is maintained above demand, there will be no where to store that oil“, he shared with Spurtnik.
The case of Brent
Another benchmark crude, such as Brent from the North Sea, is about to suffer a similar problem, said Fausto Álvarez.
“What is being done in that area – and it is coming into play in the system – is that the oil tanker companies (tankers) They are renting them to store the hydrocarbon that they cannot sell, “he explained.
This has caused the income of these companies to quadruple in this period due to the demand to store hydrocarbon at sea. “Extend physical storage with floating storage“he added.
Global aspect of the problem
In this regard, the April IEA report warned that excess oil in the market is putting pressure on the accumulation of hydrocarbon inventories worldwide. China, for example, took advantage of the collapse in prices to fill its reserves, but now it is about to fill its warehouses. As if that were not enough, the oil consultancy Rystad Energy estimates that 76% of global storage is already occupiedTherefore, it can be expected that much of the planet will soon run out of space to store crude oil.
“The problem is that the oil cannot be stored indefinitely. In a more or less standardized way, six months of storage is already a problem, because inside the oil there could be bacteria that begin to decompose the quality of the oil if it is stored for a long time, especially once it has already surfaced. To put it a bit metaphorically, taking oil out of the ground contaminates it and, if we save it, it is like a food that, even if it lasts in the refrigerator, can spoil “, Juan Arellanes highlighted.
Goldmand Sachs estimates affirm that between May and the first fortnight of June it could be reported that the world storage of crude oil reached its limit. In this scenario, it could be observed a steeper drop in oil prices, and also, some forced cuts in production due to the oversupply of crude oil.
“Supply is going to match demand, because producers are no longer going to be able to place more barrels due to the lack of storage capacity. They will surely have to adjust to the demand for hydrocarbon, so we will be seeing greater production cuts to those agreed in OPEC, but not necessarily because of that agreement, but because of operational issues. Obviously, a further collapse in prices is also expected, because there will be no way to move that hydrocarbon. When there is such parity, what will happen is that the market is going to stabilize, “said Fausto Álvarez.
This situation will be particularly detrimental to countries that, like the United States, depend on their crude oil production on land, as well as those with limited storage capacity.
The Pemex case
The last situation is particularly serious for Mexico, since, on the one hand, its storage capacity is low (11 million barrels), in addition to its increasingly less attractive oil for the international market.
“Pemex storage [Petróleos Mexicanos] and gasoline distribution companies are at the top. Gasoline consumption has been brutally reduced and you have nowhere to put it. The government is losing money because there is no sale of gasoline, and it will also be affected because the quality of our hydrocarbon is not the best, it is heavy crude. That, compared to light crudes like Brent or Saudi Arabia, leaves us in a competitive deficit, “explained Fausto Álvarez.
In the same sense, Juan Arellanes indicated that the current refined import system could be suspended, in addition to Pemex must reduce its production levels due to the lack of buyers of crude oil in the world. This, in turn, could generate other problems in the short term for Mexico.
“We will be able to consume what is being produced, but, from our refineries, it is not necessarily easy to place gasoline and diesel where it is required. We are accustomed to a refined import system, which arrives through different ports, which enters through different pipelines at the border. There could be some distribution problem. For now, we have the ‘advantage’ that we are very dependent on the importation of refined products and, therefore, that gives us a wide margin of savings. We will not be importing while the fall in national domestic demand lasts, “he said.
However, the professor of Geopolitics at the Faculty of Global Studies of the Anahuac Mexico University also identified some complications for the oil industry after the current health crisis. After the containment measures subside, the oil will be consumed again, but it is likely that demand growth ends up outstripping production.
Since 2018, the IEA has suggested that unconventional oil extraction, such as the fracking in the United States and oil sands in Canada, would not offset an eventual drop in production because of the depletion of conventional deposits. Arellanes affirmed that the current crisis has given certainty to that omen.
“If after we get rid of the problems of low prices, falling demand, technical storage and distribution problems in the following months, our headache in 2021, 2022 is going to be experiencing how the economy is slowly recovering, increasing demand, seeing how oil companies see with anguish how their production is reduced. It is the scenario that worries me the most, “he concluded.