Creating new perspectives since 2009

Price war could bring oil to $10 a barrel with storage capacity running low 

March 26, 2020 at 2:02 pm

Barrels of oil, 26 March 2020 [Daan Franken/Flickr]

A perfect storm is brewing in the energy market that could send oil prices crashing to $10 a barrel.

A combination of faltering demand resulting from the coronavirus outbreak and a price war that has seen a rise in production had already raised fears that the industry was entering its worst crisis in hundred years. Now news of shrinking storage space is expected to add to the woes of major oil producing countries.

Oil storage facilities are said to be 75 per cent full already as a result of the oil glut that followed China’s shut down of major refineries in January due to the coronavirus outbreak.

READ: Saudi urged by US to take responsibility over oil price war

The pandemic has strangled the global economy, forcing factories to shut down, grounded airlines and cut the need for fuel in general.

A sharp drop in demand would normally prompt major producers to reduce production. However, Saudi Arabia, the world’s largest producer, is locked in a price war with rival Russia and is determined to keep raising production.

With the world expected to be swimming in surplus oil the race is on to find extra storage space.

“For the first time in history we are seeing the likelihood that the market will test storage capacity limits within the near future,” Antoine Halff, a founding partner of Kayrros, a market research firm, is reported saying in the New York Times.

READ: Kuwait cuts oil expenditure due to coronavirus

It was explained that as storage space becomes harder to find, the prices, which have already fallen more than half this year, could drop even further. And companies could be forced to shut off their wells.

Industry analysts believe that the global oil sector may increasingly look to offshore oil tankers to store their extra crude oil. Pipeline companies have expressed concern over traders using their network for oil storage until prices improve.

Analysts at energy consultancy Rystad Energy have warned of a perfect storm in the industry that may see oil price falling to $10 a barrel this year.

Coronavirus is affecting the world's economy - Cartoon [Sabaaneh/MiddleEastMonitor]

Coronavirus is affecting the world’s economy – Cartoon [Sabaaneh/MiddleEastMonitor]

The US has been forced into taking countermeasures. Earlier in the week President Donald Trump announced his decision to send his special envoy to Riyadh to stabilise the oil market.

On Tuesday US Secretary of State Mike Pompeo expressed concerns over instability in the global oil market in a call with Mohammed Bin Salman. In his conversation with the Crown Prince, details of which was published in a US State Department readout, Pompeo urged the Saudis to take responsibility in stabilising the market.