International Maritime Associates, Inc.

Covid 19 and Saudi Misjudgment Sends Oil Market Reeling -- Jim McCaul  17 April 2020  

The coronavirus crisis has upended the offshore oil and gas sector.   We are seeing a repeat of the 2006/07 financial meltdown impact on the sector -- and the impact this time will be worse.

Oil demand has sharply fallen as the virus spread shuts down economic activity worldwide.  Global oil demand is expected to fall 20% in April -- some estimates of the decline are as high as 35%.  Brent is trading at $28 -- up from $25 at the beginning of April, but down 60% from early January.  

In parallel to the virus spread, Saudi Arabia kicked off a full-fledged price war with Russia by flooding the market with oil to see who blinks first.  The result -- an oil glut has been rapidly forming worldwide, especially in the US.    

Tanker tracking shows 20 VLCCs heading toward the US Gulf that loaded in Saudi Arabia in March/early April. They are carrying 40 million barrels of crude -- 8 million bbls to discharge in April, 32 million bbls in May.  These shipments will totally flood the US market, which was the intent of the Saudis.   US oil prices have now dropped below $20 and local producers are unable to cover production costs.   

US crude inventory (excluding crude oil in the Strategic Petroleum Reserve) during the past week increased by 19.2 million barrels from the previous week.   This follows a 15.2 and 13.8 million barrel increase over the preceding two weeks.  At 503.6 million barrels, US crude inventory is 6% above the five year average for this time of year.   With oil demand down US refineries last week operated at only 69.1% of their operable capacity.

The Saudis appear to have greatly underestimated the harm they were inflicting on the market -- and themselves.  Resentment to Saudi Arabia is building in the US as oil workers lose jobs at an unprecedented rate.    

A meeting last week between OPEC and Russia to discuss production cuts resulted in a conditional agreement to significantly cut production.  This was followed by a meeting on Sunday, which included G-20 countries, in which firm agreement was reached to collectively cut 9.7 mb/d from global crude supply.     

But the supply cut agreement will not be enough to return the sector to normality.   Until the virus spread is brought under control, no supply cut deal will be able to overcome the huge drop in oil demand.  Demand destruction has been too great, the oil glut is now too big -- and the producers will cheat on the deal.  

Meanwhile oil pricing will remain under pressure until the virus spread abates -- and market turmoil has forced field operators to defer investment plans.