If it continues much longer, the coronavirus outbreak could send oil prices as low as $10 and the world could run out of storage for it as part of a market reaction to the outbreak, analysts estimate.
Global oil prices fell to lows of $25 a barrel last week, recovering slightly since then. The drop was in line with a general decline in the value of commodities as the coronavirus expanded. Oil-producing nations failed to agree on a strategy to boost prices, which made the plunge even stronger.
China decided to shut down most of its refineries as part of the coronavirus lockdown, a path followed by other countries later. Since then, oil storage levels across the world’s storage facilities have climbed to about three-quarters full on average.
Analysts expect the storage facilities to continue to be filled out in the coming weeks and months, as demand for oil and natural gas is very low due to the expansion of the virus and its effect on the economy. Canada, for example, is just days away from running out of the storage of its oil production, according to the energy consultancy Rystad Energy. The rest of the world could face a similar situation in just a few months.
“Compounding the situation is the near-certainty of a steep reduction in crude-by-rail exports this year,” Thomas Liles, an analyst at Rystad, told The Guardian, “As well as deferral of spring maintenance at several key oil sands mining projects.”
The lack of storage room will lead to the global oil industry to look for alternative places to store the extra crude. One option will be offshore oil tankers, but for it to be economic oil prices would have to fall more to about $10, according to analysts’ estimations.
Barclays estimates global available onshore crude storage capacity at about 1.5 billion barrels, which could be exceeded in less than ten months. This is mainly because oil producers have been slow in cutting production despite the lower demand due to the coronavirus outbreak, they claimed.
Crude production could even increase soon, as an agreement between oil-producing countries to hold back production will come to an end. This would mean Saudi Arabia and Russia, two of the largest producers, will start competing with each other to get a larger share of the market.
This oil price war could raise global oil production by more than 2.5m barrels of oil a day, which would outpace demand for crude by 6m barrels of oil a day, according to Rystad -- which estimates the world has about 7.2bn barrels of crude and products in storage.