The winners and losers of the world’s surplus oil

The winners and losers of the global oil surplus (oversupply), in light of the continued collapse of demand affected by closings and restrictions imposed to limit the spread of the emerging Coronavirus.

Despite the agreement of the oil producers of OPEC and its allies led by Russia to reduce production by 9.7 million barrels per day starting next May, the capacity of oil storage in the world will be full before the middle of May, according to many analysts.

US oil prices collapsed to more than 300 percent, during Monday’s trading, and recorded a negative $ 37 per barrel upon settlement.

Futures contracts for US oil to the closest maturity during trading on Monday to negative for the first time in history with the full storage of crude storage warehouses, which discourages buyers, while weak economic data from Germany and Japan cast doubt on the date of recovering fuel consumption.

US benchmark WTI contracts for delivery in May fell 55.90 dollars, or 306 percent, to minus $ 37.63 a barrel, while Brent crude futures fell 9.2 percent to 25.43 dollars a barrel.

Oil and energy economist Michael Lynch believes that sectors of the oil industries and some countries and companies will be the biggest winners of this crisis compared to other losers, according to an article published in Forbes magazine.

Losers

The OPEC producers who do not have sufficient refining capacity for oil, and do not have long-term supply contracts with importing countries are the most losing, in this case: Angola, Nigeria and Iraq, according to the economist.

The reason for this is that Iraq, which is the second largest oil producer in OPEC, sells most of the crude that it produces, and Saudi Arabia is also doing so.But the situation is different for Saudi Arabia (the largest oil producer), because it has made some pivotal deals in recent years with China (the largest oil importer), which guarantees it long-term demand for its crude in the market.

According to Lynch’s estimates, the refineries ’capacity for each OPEC member country, according to its targeted production during the coming May and June, shows that the combined domestic refining capacity of these countries represents half of what they produce if they all adhere to their shares according to the agreement.

Lynch’s estimates added that, when taken into account the commitment of the countries to the agreement will not be 100 percent, this means that OPEC members will produce more than twice their refining capacity for oil.

Therefore, countries with long-term oil supply contracts will be in a better position than those that rely on spot crude sales, according to Lynch, who warns that spot oil markets are currently facing demand problems.

The oil producing countries that have higher shares of immediate sales will not be able to store compared to others, and that the huge refineries suffering from excess supply will try to get rid of some long-term contracts”.

On the corporate level, companies that have more refining capacity will have refineries to send the surplus to, given that the market for refined products is also weak, because the demand for gasoline, diesel, and jet fuel is low worldwide.

Distributors of refined products (gasoline, diesel, etc.) will bear the greatest losses in this crisis, as consumption is at its minimum, as is the case, for example, in the United States, the largest consumer of these products.

The winners 

As for the winners from the current situation, they are the owners of the largest storage capacity, whether on land or at sea.

Oil Price says that storage was the most wanted “commodity” in the energy market during the past month in light of the collapse in demand and high supply.

Currently, traders are scrambling to reserve floating storage sites, giant tanker rental rates are increasing significantly, and storage costs are rising, in order to be able to meet future sales, as traders expect demand to recover after the Coronavirus pandemic recedes.

The International Energy Agency said this week that despite the measures taken by OPEC + and the Group of Twenty to reduce production, the oil industry will be undergoing testing the capacity to store in the coming weeks.

The report added, “The oil industry has never before come close to testing its logistical capacity, given the maximum supply”.

In the United States, storage space is likely to fill up by mid-May, and lower oil prices may play a role in forcing shale oil companies to cut production.

ConocoPhillips, one of these companies, said it will voluntarily cut 200,000 bpd production in Canada and the United States until market conditions improve, and others are likely to follow soon.

With the oversupply of oil, the holders of higher storage capacity will be the biggest winners in these extraordinary times of the oil industry.

Storage problem

Analysts from the Wall Street Journal have previously made it clear that falling futures prices for immediate contracts would force oil companies to pile barrels in more expensive places, including on ships.

Analysts pointed out that the barrels are accumulating at an unprecedented pace, which increases the risk of global spaces running out of storage soon. Which has become the scene today in US oil futures contracts for next May, amid fears of a repetition of the same scenario for contracts next June.

Last Saturday, shipping sources told Reuters that dealers are storing a high record estimated at 160 million barrels of oil on board ships, which is twice the level two weeks ago as they seek to address a supply glut caused by the decline in global demand due to the Coronavirus.

Meanwhile, dealers rushed to find storage space on land and at sea amid what is believed to be the largest oil surplus in history.

Shipping sources said that the volume of oil in the floating stock on the tankers amounted to at least 160 million barrels, including 60 supertankers, which have a capacity of about two million barrels.

By comparison, the number of chartered carriers with storage options was between 25 and 40 supertankers in early April, and less than a dozen tankers in February, according to the sources.

They added that smaller carriers are also being used, which also enhances stored volumes.

The previous time floating stock levels reached close to that was in 2009, when traders stored more than 100 million barrels at sea before they began discharging them.