Prices have been declining since Saudi Arabia and Russia launched an oil price war earlier this year, pumping out millions of barrels of oil just at the moment coronavirus caused demand to collapse.
Some of the world’s biggest producers have now agreed to implement production cuts from May 1, reducing some of the glut of oil that is currently splashing around across the globe. But many do not expect the issue to be resolved for years.
“It’ll likely take three years to work off excess stocks – maybe longer,” says Jamie Webster, an energy analyst at Boston Consulting Group. “Higher prices are very far down the track, and it is possible we are not actually going to move back to those prices, ever.”
For now demand will remain virtually nonexistent due to coronavirus, and supply will continue to far outweigh demand due to insufficient cuts led by Saudi Arabia and Russia, Webster says.
To make matters worse, storage space for excess, unused oil is almost full. “The last gasp to balance this market is to shut in production,” he adds. “This looks like where the market is going.”
To shut in production, or to close wells and stop them from pumping oil, will be devastating for the industry.
Turning off wells will result in huge job losses and potentially dozens of bankruptcies, experts say – it is an expensive procedure that can hamper future flows once the well is turned back on.
For some producers, shutting down their operation is actually more costly than continuing to pump at a loss.
This will do little to alleviate the US storage crisis that triggered this week’s record crash.
“This creates a particularly stark challenge for the United States,” says Reed Blakemore, deputy director of the Atlantic Council Global Energy Center, “where a prolonged low-price environment has already introduced considerable stress on small cap producers across the US shale patch.”