Crashing Oil Demand Drives 17 MMbpd Global Output Cut in Q2

May 12,2020

Consulting company IHS Markit estimates the demand for oil to be 22 MMbpd less than a year ago in the second quarter of 2020. IHS Markit Vice President and Head of Oil Markets Jim Burkhard said, "The Great Shut-In is underway a swift and brutal adjustment of global oil supplies to a lower level of demand. All the developing countries are vulnerable to the same brutal market forces. Some would have greater influence than others. But there's nowhere to run.”

IHS Markit defined three main factors that form the decision to cut production: technical and logistical factors, including restart difficulty-technical factors, relate to the degree of operational complexity such as terrain, field depletion, reservoir drive, production system configuration, and reservoir fluid composition. Complexity and field complexity affect the ease or difficulty of restarting development, including whether output may be lost forever or merely postponed. Other technical considerations are the availability of health, safety, and staff. Logistic factors include offtake demand, transport options and availability of oil storage.

Financial considerations – These include operating profits, existing oil price levels, future forecasts of the price of oil, the financial health of the operator, availability of resources and alternate spending options, such as deciding to spend funds on other projects.

Regulatory and contractual terms-This involves maintaining conformity with government regulations for the shutting-in wells, government directives to adjust production, and contractual agreements. The Government's directives to comply with the OPEC+ agreement to cut production fell under this category. The obligation to supply associated gas (i.e. gas generated as a by-product of a crude oil well) is an example of a contractual condition that may have an effect on production decisions. Upstream transactions that are integrated with downstream assets — such as refineries and petrochemical facilities — downstream market conditions and downstream asset needs could have an effect on upstream output decisions, particularly when assets are under combined ownership.

This demand collapse, coupled with low oil prices, supply shortages, and government-ordered restrictions, is driving an extraordinary level of liquid production reductions and shut-ins across the world. These are anticipated that North America and OPEC members, as well as countries in the Commonwealth of Independent States, in particular Russia, would be the source of much of the production cuts. It is a complicated question precisely where, why, and how supply reductions are going to take place. There is no defined equation here. Oil is manufactured in a wide range of conditions, which implies that there is no fixed equation and that decision factors differ.

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