How the world produced so much oil the cup almost runneth over

Oil so cheap it was negatively priced for the first time ever, and so much of the black stuff the world was running out of places to store it.

23/05/2020 10:00:00 PM

Oil so cheap it was negatively priced for the first time ever, and there was so much of the black stuff, the world was running out of places to keep it. 9News

Oil so cheap it was negatively priced for the first time ever, and so much of the black stuff the world was running out of places to store it.

Excess production from Saudi Arabia and Russia, which were mired in an epic price war, were partially to blame for the supply glut.Around 60 supertankers, holding two million barrels each, have been anchored up off Singapore, the US coast and in the Arabian Gulf.

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But the biggest problem has been anaemic demand, caused by the coronavirus.Drivers around the world were forced off the roads by the crisis. Most passenger jets are grounded. Countless factories remain offline.Oil analysts like Anas Alhajji, an energy expert based in Dallas, has watched on as the market did the unthinkable.

He said "demand destruction" had trashed prices and left the industry in "complete shock"."The winners are those traders who shorted oil," Dr Alhajji said."Those traders made tonnes of money."A pump jack operates in an oil field in the Permian Basin in Texas.

(AP / Jacob Ford / Odessa American)The Chevron Genesis Oil Rig Platform is seen in the Gulf of Mexico near New Orleans.(AP / Mary Altaffer)The big loser? The US shale industry, which in recent years had propelled America from an oil importer to oil exporter.

Oil prices have tumbled to such precipitous lows that the US industry will likely see many bankruptcies and be radically affected for some time.Old traditional producers like Saudi, Iraq, Iran and Russia will be the medium and long-term beneficiaries, Dr Alhajji said.

"No one can even do anything in the US because the prices have been too low to even operate. We are seeing bankruptcies and we are going to see more of it."Oil prices have risen in the past three weeks as states have rolled back lockdown provisions and global output has decreased.

But the hit to oil companies, in the US and beyond, has been severe.Saudi Aramco's profit dropped 25 per cent and that was before oil prices hit rock bottom.In the US, ExxonMobil posted its first quarterly loss following its 1999 merger. ExxonMobil, the biggest US oil company, has never reported a quarterly loss since its mega merger with Mobil.

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Dr Alhajji said it was difficult to predict where the market would go in the short term.But he was more certain that tumultuous events in 2020 would trigger "a major decline" in US production.A man rides a camel through the desert oil field and winter camping area of Sakhir, Bahrain.

(AP / Hasan Jamali)The rise of the US shale industry enabled America to become the world's biggest producer.Unlike traditional wells, shale oil wells experience rapid declines in output.To offset this, the shale industry requires constant investment. New wells must be opened for overall supply levels to remains consistent, let alone grow.

But new investment in shale has evaporated when global demand dropped fell off a cliff, Dr Alhajji said."We are going to see a major decline in US shale production that cannot be recovered quickly," he said.The shock would reverberate up and down the supply chain, he said.

Global oil demand is usually around 100 million barrels a day. Read more: Nine News Australia »

And yet it’s back over a dollar a litre in no time. Ripped off blind everyday and no one does a thing about it.

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