Current global output levels cannot be sustained throughout the second quarter because oil storage capacity will fill up.
IHS Markit estimates that the gap between world oil (liquids) supply and demand will be 7.4 MMb/d for Q1 2020 and 12.4 MMb/d in Q2 2020.
This differential adds up to a first half 2020 surplus of 1.8 billion barrels. That exceeds the upper end of our estimate of available (empty) crude oil storage capacity, which is 1.6 billion.
This means, owing to lack of storage, that more production will be cut or shut in than previously anticipated.
But where will production be forced to go lower—or even shut in?
- Vulnerability to reduced production and/or shut-ins is not uniform around the world. An important variable that will shape specific outcomes is the volume of available accessible domestic crude oil storage capacity relative to domestic production. To be sure, storage facilities that can be accessed across borders and seas can help alleviate domestic storage shortages. Storage availability will be a larger factor in determining where production gets cut rather than just operating cost breakevens, since there are risks to shutting in production for purely economic reasons, such as reservoir damage in some cases.
- IHS Markit Crude Oil Markets service measures storage vulnerability by calculating how many days of domestic crude oil production could be placed in available storage. For example, Nigeria is the most vulnerable among the areas we measured. Estimated first-quarter 2020 daily production of 1.9 MMb/d would fill up available local storage in 1.5–2 days if no production is moved onward.
- Available storage capacity relative to production varies widely. The number of days it would take domestic crude oil production to fill available national or regional storage ranges from Nigeria at the low end to China, which may have as much as 52 days of daily production storage available.
- Among the three largest oil producers, Russia has the least amount of available storage capacity—about 8 days. Saudi Arabia has 18 days, and the United States has 30 days.
“The current supply/demand gap adds up to a first half 2020 surplus of 1.8 billion barrels. That exceeds the upper end of our estimate of available crude oil storage capacity, which is 1.6 billion. Production is going to have to be reduced or even shut in. It is now a matter of where and by how much.”– Jim Burkhard, vice president and head of oil markets, IHS Markit
To be sure, the rank order of which regions shut in production will likely be more complex than this figure implies. For example, the velocity at which the surplus is materializing is an unprecedented challenge, and not all tanks are available to all parties. Some storage facilities are dedicated to the activities of specific companies. However, an analysis of overall domestic storage availability as a ratio of production does provide a useful metric to determine which producers are vulnerable.
“Those with better access to storage options may fare better than others. Creative storage solutions are likely to emerge, but they are unlikely to make up for the sheer pace and scale of the supply surplus.”– Aaron Brady, vice president, IHS Markit
Full List of Domestic Crude Oil Storage Available by Country:
|SORTED SMALLEST TO LARGEST||Days of storage|
|US PADD 4||12.8|
|North American system*||17.9|
|US PADD 3||20.5|
|US PADD 2||38.7|
*Western Canada and US PADDs 2, 3, and 4
**All of the United States, PADDS 1-5.