US To Halt 1.75 Million Barrels Of Oil Production Per Day (IHS Forecast) — Just The Beginning
For those who look past next week, it’s been clear for years that the oil industry has been in big trouble. It’s future is dark. (Bad pun intended.) Just as we’ve seen coal collapse and many companies go bankrupt, oil has the same destiny. Peak oil demand is long gone, and while this coronavirus period combined with dumping by certain oil-enslaved countries may have presented a short-term extreme that is particularly painful for oil companies, the long-term playing field doesn’t look any rosier for this fossil industry.
With the future clear, one would expect that smart investors (the ones who didn’t already bail) would be quickly finding their ways to the exit in the coming few years. But if they needed a push, the first half of this year is offering it. On that note, IHS Markit has some projections for us.
“Due to the collapse in oil prices, IHS Markit expects U.S. producers are in the process of curtailing about 1.75 MMb/d of existing production by early June due to operating cash losses, lack of demand and storage capacity, and an unwillingness to sell resources at the very low prices available since the onset of the COVID crisis.”
IHS Markit does expect demand to mostly bounce back later this year and curtailed production to ramp up again. Nonetheless, if EV market share continues to grow how it’s been doing, the market is going to get a more serious rattle from declining oil demand and truly vast overproduction.
Even from this short-term crisis, IHS Markit expects no real return to “normal,” at least not soon. “However, about one third of the volumes (approximately 550,000 b/d) will stay off the market for the long-term — or at least until WTI prices push above $50/bbl, justifying the capital spending needed to repair the impact that some of the wells will have incurred from being shuttered.”
“The oil market fear that characterized March and the extreme price pressure that producers felt in April have galvanized producers across North America into unprecedented action,” Raoul LeBlanc, vice president of financial services at IHS Markit, added.
“Not even the United States’ huge network of storage facilities and associated infrastructure was enough of a buffer for a crisis on this scale. Negative oil prices and the collapse of WTI futures contracts were a potent signal that stronger measures, namely shut-ins, were needed to curb oversupply.”
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For more detail on what’s expected to be shutting down, why, and the unique features of the US oil market, check out the full IHS press release.
In case you missed the news last month, note that the market got particularly spooked when oil prices went below $0 for a while. Yes, on April 20, “the price of a barrel of West Texas Intermediate fell below -$40 a barrel briefly,” and the article linked there explains why. The short and sweet version of it, though, is that there was far more oil available than anyone wanted. In fact, oil tankers were lurking off the coast of California keeping their own form of social/physical distancing from each other in order to prevent a disaster. It was an eery move.
Another thing to keep in mind is that there are many downstream and upstream connections to this. Also, prior to the oil price collapse, recall that we saw a similar kind of effect stirring in the gas station industry — many gas stations started facing the threat of bankruptcy. I am confident in thinking few of us would shed a tear.
As Bloomberg New Energy Finance founder Michael Liebreich pointed out 4 years ago, there are numerous effects, side effects, and eventual ramifications from the electrification of transport. We’re starting to see some of these inevitable outcomes come out of hiding.
Related: Fossil Industry Extracting From Another Source: Taxpayers
Top image via US Coast Guard (public domain image)
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