Oil Installations Have to Close Quickly Because Storage Becomes Full
Oilfield installations that pump the fuel out of the ground need to be shut down faster to counter the global oversupply in the oil market.
Otherwise, all the warehouses in the world will fill up within three to four weeks, energy economist Hans van Cleef of the economic office of ABN AMRO told the ANP.
The oil price turned negative for the first time in history last week after demand fell due to the corona crisis and higher production from Saudi Arabia and Russia, among others.
“No storage means a big problem and possibly even an environmental disaster,” says Van Cleef. In that scenario, the oil price will probably drop below zero again. This makes it tempting for oil producers in countries with less stringent enforcement to dump the oil somewhere in nature.
Still, it is unlikely to get that far, the economist believes. He already sees that many oil installations are being shut down. This is particularly the case with producers of shale oil, or oil from offshore drilling platforms, who usually need a higher oil price to remain profitable.
But it is not going fast enough yet, says Van Cleef. This is also visible in the oil market, where the US oil price fluctuates near USD 10 on Tuesday after a sharp decline on Monday.
Closing an oil installation is a painful choice for a producer, Van Cleef explains. It can often not be restarted so quickly.
“It works in oil production just like an old clock with grandma and grandpa. If you leave it alone, it will tap on, and if you mess around with it, it will break.” The installation can often only be restarted if the producer is prepared to invest extra.
For many commercial parties in the United States, which are often sole proprietors or small businesses, that is not an option. That’s why they keep pumping up the oil until the last moment. Nevertheless, their costs are higher than with the Russian Rosneft or the Saudi Saudi Aramco, so they should bleed first, the economist thinks.