Only the old hands at the Coffeyville oil refinery could remember anything like the prices posted this month. The small Kansas plant in the heart of the rural US was offering just US$1.75 per barrel for Wyoming sweet crude.
With more than 2 billion people on lockdown from India to California, energy demand has plunged. In corners of the US, Canada, Russia and China, oil prices at the well head are collapsing under the weight of an unprecedented glut.
With it, the industry is bracing for something that last happened on this scale 35 years ago: producers shutting down their wells as pumping crude makes no economic sense.
“I have never seen anything like this in the markets,” said Torbjorn Tornqvist, cofounder of Gunvor Group Ltd, a large commodity trading house. “We’ve never seen anything even close to today.”
The oil market — hit by the double blow of a demand slump and a supply surge as Saudi Arabia and Russia wage a price war — is battling a surplus of as much as 20 percent of global consumption.
The consequences are brutal: prices are now low enough to force a widespread suspension of production, or a shut-in as it is known in the industry. For those waging the price war, it counts as a victory — as long as the shut-ins happen elsewhere.
Brent and West Texas Intermediate, the benchmarks closely followed in Wall Street, are hovering at about US$25 per barrel, but in the world of physical oil — where actual barrels change hands — producers are getting much less.
The industry is navigating what Mizuho Bank Ltd oil analyst Paul Sankey described as “uncharted waters to unknown lands.”
As the pain spreads, industry executives believe many other companies will stem production in the next few days.
“We need to cut crude supply by 10 million barrels a day pretty quickly,” said Russel Hardy, the head of top independent oil trader Vitol Group. “Oil prices will need to go lower, to bring the prices to a level that triggers a response.”
The last time the oil industry faced widespread shut-ins was in 1986, when Saudi Arabia also ravaged the market in a price war.
Put simply, the world cannot continue pumping at the current level of about 100 million barrels per day while demand is as much as 20 percent lower.
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