The oil markets are not “out of the woods” despite a historic cut by Opec+ to offset the decline in demand caused by the coronavirus pandemic, according to Opec's secretary general.
Crude prices fell nearly 70 per cent in April, from their most recent peaks in January, as widespread movement restrictions to prevent the spread of the coronavirus battered energy demand.
“One of the major concerns of the industry was that as a result of the double shock on supply and demand, the industry was going to exhaust storage capacity, both onshore and probably offshore,” Mohammad Barkindo told a virtual panel organised by the Canada-UAE Business Council.
As the pandemic brought air and road travel to a halt, oil producers scrambled to find adequate storage to park their crude as demand plummeted in April. Meanwhile, concerns about an exhaustion of crude storage options as inventories built up steadily further pressured oil prices. On April 20, the West Texas Intermediate, the key US gauge, sank to sub-zero levels and briefly traded at -$40 per barrel amid storage constraints at its physical delivery point in Cushing, Oklahoma.
The markets would have headed to a “total crush” if the global available storage capacity was allowed to exhaust, said Mr Barkindo.
"The preliminary numbers that we saw here in the secretariat, that we reviewed... the projected build-up was in the region of 1.3 billion barrels above the five-year industry average,” he told delegates.
"Now to put this into context, in the last downturn [from] 2014 to 2016, we saw stocks build above the five-year average to an unprecedented level of 403 million barrels,” he said.
Opec+, an alliance Opec producers and non-members led by Russia, was formed in 2016 in Algiers to help draw down global inventory levels and flush out excess supply.
“[It took] four years, to be able to help the market, to assist the market to drain down the stocks to their five-year average,” the secretary general said.
The decision by Opec+ producers to cut back 9.7 million barrels per day of production from May to June, with an extension until July, helped “arrest” the surge of stocks to 1.3 billion.
UAE's Minister of Energy and Industry Suhail Al Mazrouei, who was also on the panel, called the collapse in demand due to the pandemic “the single largest shock to the world economy” and said the oil sector was “still in the woods".
A nearly 30 per cent depletion in demand necessitated “unprecedented action,” the minister said.
"Our worry was saving the whole industry, saving millions of jobs, saving investors or convincing investors to come back and invest in this commodity after Covid-19.
"So those are the areas that we were keen on, because if we don't do that then we'll have another shock a few years from now.”