Analysis: Fate of oil & gas market grips industry

World oil demand is expected to drop by the largest volume in history in the first quarter of 2020, and deteriorating economic conditions could lead to the most extreme global oil supply surplus ever recorded.

If the oil price war continues amidst the coronavirus crisis and a global recession, the surplus could range from 800 million to 1.3 billion barrels in the first half of 2020, according to data from IHS Markit Ltd.

The previous largest six-month global surplus was a cumulative 360 million barrels in late 2015 to early 2016, according to the London-based firm.

Counting barrels is difficult under normal circumstances, but the looming imbalance between demand and supply is so vast, based on the current trajectory, it belies typical margins of error, according to Jim Burkhard, IHS Markit vice president and head of oil markets.

Much like the coronavirus, the decline in demand for oil is spreading across the globe, grounding planes, halting school and work commutes, idling manufacturing plants and cancelling entertainment events.

Attempts to contain Covid-19 have slowed travel and led to unparalleled stoppages of economic activity with millions around the globe "sheltering in place" at home to slow the spread by social distancing.

"There has been a dizzying drop in world oil demand and a dramatic pivot in Saudi oil production policy. If this situation persists amidst a recession, it points to the possible build-up of the most extreme global oil supply surplus ever recorded," Burkhard said 16 March.

Rubber and polymer companies that serve the underground and underwater oil and gas industry could feel the pain of lower demand for seals, gaskets and other parts for drilling motors, oil platform systems, sub-sea valves and refinery equipment.

Automotive suppliers also will feel the pinch.

New vehicle sales could plummet by as many as 2.4 million units compared to 2019 because of the pandemic's impacts on vehicle inventory and consumer confidence, according to research released 16 March by Santa Monica, California-based ALG, a subsidiary of True Car Inc., which offers market insights and residual value forecasts.

"A quick recovery by the end of April would lead to roughly half a million lost sales, while a prolonged slowdown through the end of the year would result in a nearly 15% year-over-year sales decline in 2020," Eric Lyman, ALG's chief industry analyst, said in a statement.

Forecasts are changing day-to-day, he added, offering a current likely scenario for 2020 new vehicle sales in the mid-15 million-unit range.

The oil surplus in the first quarter of 2020 will be at least 4 million barrels a day over last year, IHS Markit said, and could be more than double that by March and April.

The possible surplus of 800 million to 1.3 billion barrels in the first six months of 2020 factors into the impacts of increasing travel restrictions, reduced commuting and the likelihood of a severe global slowdown extending into the second quarter.

"The last time that there was a global surplus of this magnitude was never. Prior to this, the largest six-month global surplus this century was 360 million barrels. What is coming will be twice that or more," Burkhard said.

World oil demand in the first quarter will be at least 4 million barrels a day below the prior year. The largest impact on production in 2020-21 will be felt in the US, where IHS Markit said crude oil production could drop by 2 million to 4 million barrels per day over 18 months.

There also are questions about whether oil production and supply chains will be affected by a lack of workers in key production areas around the world, according to IHS Markit.

Three scenarios

There's a chance of several oil market scenarios playing out going forward, IHS Markit said.

A "supply truce" could be reached between Saudi Arabia and Russia, leading to production restraint even though output remains above early 2020 levels. Or the growth in world oil demand could return by the third quarter and prices could reach the $40-$50 (€36-€45) range per barrel.

Oil prices have been weakened by a recent decision by Saudi Arabia to substantially boost oil supply by 2.6 million barrels per day, relative to February levels. Meanwhile, Russia has said it will increase production by 300,000 to 500,000 barrels a day.

A third situation could evolve where there is no supply restraint and a prolonged drop in oil demand occurs. This could lead to an unprecedented billion-barrel surplus as global demand falls by 5 million barrels a day for the year. Oil prices would drop to their lowest levels in a generation when the surplus peaks and U.S. production would begin a steep decline.

Or there could be a rapid recovery with the world economy, and oil demand would be in repair mode by mid-year with oil prices buoyed by production restraint.

Other assessments

Goldman Sachs Group Inc. expects a record oil surplus of 6 million barrels per day by April. And that's for a global market that usually consumes 100 million barrels a day.

US energy companies that rallied to become the world's biggest producers thanks to a boom in pricier shale oil are planning to reduce investment and drilling in response to the plunging prices.

"Demand losses across the complex are now unprecedented," Jeff Currie, Goldman's head of commodities research, wrote in a report, adding oil consumption is down by 8 million barrels a day.

Despite oil's spectacular crash, the state-run Saudi Aramco announced March 16 that it has production plans in April for 12 million barrels a day, which is its maximum capacity.

"I doubt if May will be any different," CEO Amin Nasser told investors.