The production cuts, even at a maximum of 20 million bpd, are not enough to make up for the demand loss, at 30 million bpd currently, equivalent to 30 percent of global demand.
Yaw Yan Chong
The fall in oil prices, which saw crude benchmarks fall to 18-year lows and the US WTI benchmark plummet into negative levels for the first time in history, is driven by a sharp and sudden fall in demand resulting from the COVID-19 outbreak that has plunged most of the world into lockdown, with unprecedented curbs on air and land travel, as well as on economic and industrial activity. This is not the least beneficial for anybody, let alone India, which has already imposed the world's largest lockdown of its 1.3 billion population.
In the early days of the outbreak in early March, oil prices suffered a sharp and rapid drop of 50 percent following a spat between Saudi Arabia and Russia over production cuts, leading to both to maximise output levels and flooding the market with their both oil in a bid to gain more market share. At the time, Indian refiners were among the first to cash in, taking extra volumes, leading to record-high imports for March at 20.3 million barrels.
However, the bubble quickly burst, as the COVID-19 outbreak spread rapidly across India, forcing the lockdown less than two weeks later. This has, in turn, led to a sharp drop in demand for diesel, gasoline and jet fuel in the country, as is the case with rest of the world. Margins for gasoline and jet turned negative, while that for diesel fell to multi-year lows of under $6 a barrel.
The same Indian refiners who had earlier asked for the incremental crude barrels now have a dilemma with the sudden drop in demand for refined products. In response, refiners, such as Indian Oil (IOC), Mangalore Refineries & Petrochemicals (MRPL) and Hindustan Petroleum (HPCL), slashed output by cutting refinery runs by about 1.4 million barrels-per-day of capacity, or about a third of the country’s 5 million bpd capacity.
IOC, which accounts for about a third of the country’s total capacity, has cut 25-30 percent of its 5-million bpd capacity; MRPL has shut its Panipat plant, while HPCL has declared force majeure on two Iraqi cargoes of 1 million barrels each and cut runs at its Mumbai facility by 10 percent.
Even Reliance, the world's largest refiner, was not spared, and was seen offering crude barrels in the Asia spot market. Both Mangalore Refineries & Petrochemicals (MRPL) and Hindustan Petroleum (HPCL) also declared force majeure on some their crude liftings, mostly from the Middle East.
To cope with the sudden surplus in crude supply, the Indian government decided to move the extra barrels into its strategic petroleum reserves (SPR), filling its 36.87-million-barrel capacity at its three sites in the country's south.
It remains to be seen how the situation will play out -- the OPEC+ alliance, comprising of Saudi Arabia, Russia and their allies, have agreed to cut production by an unprecedented 9.7 million bpd, with other major producers, including the US, Canada, Brazil, Mexico and Norway, agreeing to allow their production levels to decline via natural attrition in line falling demand, taking to total production loss to as much as 20 million barrels per day.
However, less than a week after this historic cut was agreed, prices collapsed further, with Brent falling under $20 a barrel and WTI falling into negative territory for the first time in history.
The production cuts, even at a maximum of 20 million bpd, are not enough to make up for the demand loss, at 30 million bpd currently, equivalent to 30 percent of global demand. We expect the market to weaken further as long as COVID-19 remains widespread and the lockdowns remain.
(The author is Director at Refinitiv Oil Research.)
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