The economic contraction provoked by the COVID-19 pandemic is negatively impacting demand for all goods, services and commodities. However, the oil industry is also facing another unique dynamic – increasing oil supply. The collapse of the Opec+ agreement in early March led key oil producers – including Saudi Arabia, Abu Dhabi and Russia – to increase supply to a market in which demand is contracting. This market share war between competing producers has accelerated an oil price collapse, with most of the industry in the crossfire. Increased oil supply and reduced demand has started a race for transportation and storage and inflated the value of tankers and tankage in recent weeks.
The demand collapse is historic, but so too is key producers’ output. Oil that is not being consumed must be stored in inventory. The term structure of the crude market is in contango, meaning future prices are higher than current prices. This creates a financial incentive to store oil in inventory and sell forward for future delivery, but also increases storage cost. Meanwhile, the energy price collapse has impaired oil and gas producers’ cash flow and, in turn, industries that are dependent on those cash flows such as pipelines and oilfield services.
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