Oil market shock to spill over into global supply chains

The global crisis caused by the coronavirus pandemic will be felt throughout oil’s global supply chains and ripple into other parts of the energy sector, the International Energy Agency (IEA) said in a report.

Oil prices crumbled as the pandemic slashed global fuel consumption, with further pressure from a supply shock due to the end of production cuts from OPEC producers and Russia.

Crude oil prices ended a volatile quarter with their biggest losses in history, and declined about 55% in March, the most on record. Prices also plunged to their lowest level since 2002 on Monday. [O/R]

About 5 million barrels of oil extracted worldwide every day are not attracting high enough premiums to offset the costs of extracting it out of the field, according to the Paris-based IEA agency.

Prices available to producers in Western Canada have dropped to single digits, and instances of negative prices have also emerged in parts of North America for other grades, IEA said in the report.

Oil producers have responded by implementing major reductions to their spending on new production, with the initial cuts in the 20%-35% range relative to what was previously planned for 2020, the report said. [nL4N2BI4QP]

IEA had earlier estimated 50%-85% drops in net income for selected producer countries in 2020, compared with 2019, but these declines could be even greater depending on the extent of demand shock.

Many oil majors will re-evaluate their existing portfolios, possibly leading to another wave of refinery closures. [nL4N2BN72T]

The agency also warned against the implications of oil price collapse on other energy sectors, adding a sustained period of low oil prices would affect the prospects for clean energy transitions such as natural gas.

“Oil at $25 a barrel would leave some international gas suppliers struggling to cover their operating costs, and the depressed spot market for gas would not provide any relief.”

Reporting by Diptendu Lahiri in Bengaluru; Editing by Lisa Shumaker

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