The IEA didn't mince words with the headline on Wednesday's explainer about the upended market: "The global oil industry is experiencing a shock like no other in its history."
Where it stands: It says the biggest force is the utter collapse in demand as the coronavirus outbreak freezes much transportation and economic activity, plus the supply shock from the end of the OPEC-Russia restraints.
- The massive lockdowns mean one of the "traditional stabilizers" — more consumer activity from low prices — is missing.
- "Instead, a rapid build-up of oil stocks is starting to saturate available storage capacity, pushing down prices further."
What they found: There are daunting economics and hard choices facing producers.
- "At the moment, about 5 million barrels of oil produced worldwide each day is not fetching high enough prices to cover the costs of getting it out of the ground. ... These operations are now losing money on every barrel they produce."
- (That 5 million figure is based on Brent crude at $25 per barrel; this morning it's at around $27.34.)
The intrigue: Differences in extraction costs mean that lower price hit the economics of North American production harder than fields in the Middle East and Russia.
But, but, but: While a substantial amount of global output will likely stop (IHS Markit sees 10 million bpd cut or shut-in from April to June), the IEA cautions: "The economics of getting oil out of the ground are not necessarily a good guide to which operations will actually halt production."
- They note that some producers will consider how long they estimate the crisis will last and balance that against the costs of shutdowns and possible restarts.
- "Moreover, some producers may opt to wait and see if weaker rivals go out of business, which would improve the environment for those who stay in the game."
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