Crude Oil, No More Storage Space... Some Areas Selling at $1 per Barrel Clearance Sale

[Asia Economy Reporter Naju-seok] As the global demand for crude oil decreases due to the novel coronavirus infection (COVID-19), the oversupply phenomenon is accelerating. Due to the unprecedented drop in demand, there is a shortage of storage space for crude oil, raising concerns that a situation may arise where crude oil is sold at a premium.

On the 1st (local time), according to OilPrice.com, oil trading company Trafigura predicted that daily global crude oil demand would decrease by 30 million barrels this month as countries issue stay-at-home orders to curb the spread of COVID-19. On the other hand, Saudi Arabia, which used to produce 9.7 million barrels per day, announced plans to increase production to 12.3 million barrels, followed by other oil-producing countries such as the United Arab Emirates and Iraq also announcing production increases. This is a situation where demand is decreasing but supply is increasing.

Moreover, the refining margin (Crack Spread), which refers to the price difference between crude oil and refined products, has turned negative due to the drop in demand, leading even refiners to refrain from securing crude oil. Brjan Schildrop, an analyst at Sweden's SEB Markets, said, "Refineries everywhere are losing money every time they refine crude oil or are unable to secure storage space for refined products."

In particular, Schildrop predicted that as refiners refrain from refining crude oil, crude oil producers will face difficulties in finding places to send their crude oil. He explained, "For companies producing crude oil on land, the local crude oil price may fall below zero because (due to lack of storage space) there is a need to send the produced crude oil somewhere."

Some crude oil producers in certain regions of the United States are trading barrels at prices in the $10 range. In some areas, barrels are even traded at $1 per barrel.

The International Energy Agency (IEA) also analyzed that crude oil producers are producing crude oil at a loss amid the oil price crash. According to the IEA report, about 5 million barrels of crude oil are being traded at prices lower than the cost of crude oil extraction.

Meanwhile, a series of profitability deteriorations are worsening the management difficulties of U.S. shale companies. U.S. shale company Whiting has filed for bankruptcy protection. U.S. President Donald Trump plans to meet with representatives of the oil industry at the White House on the 3rd due to the worsening management difficulties of U.S. shale companies.