Oil and gas stocks tumbled in Europe again on Wednesday after the International Energy Agency warned that the recent global deal to cut supply won’t be enough to rebalance the market any time soon.
By 5:25 AM ET (0925 GMT), the Euro Stoxx Oil & Gas index was down 4.6%, after the IEA warned that there soon won’t be anywhere to store the world’s surplus oil, something that will force producers to stop producing. The Stoxx 600 was down only 1.7%, while the FTSE 100 was down 2.2% and the CAC 40 down 1.9%.
“The implied stock build-up of 12 mb/d in the first half of the year still threatens to overwhelm the logistics of the oil industry – ships, pipelines and storage tanks – in the coming weeks,” the IEA said.
Forced shut-ins can be particularly serious for oil companies because they can damage oil reservoirs, permanently reducing the amount of oil recoverable. The IEA expects non-OPEC+ supply (mainly the U.S. and Canada) to fall by some 3.5 million barrels a day in the coming months, something that may well include forced shut-ins.
Royal Dutch Shell (LON:RDSa) shares lost 4.4%, while BP (LON:BP) shares fell 6.3% and Total (PA:TOTF) shares fell 5.3%. The worst hit were, as usual, the companies already in a precarious financial position: independent U.K. upstream company Tullow Oil (LON:TLW) shares fell 20.8% while Norwegian services company Seadrill (OL:SDRL) stock fell 13%. Austria's OMV (VIE:OMVV) - which is mainly a refiner - fell 9.8%.
The sector had recovered strongly in the last couple of weeks as momentum built towards a global deal on cutting global supply and ending a damaging price war over market share, triggered in March by Russia and Saudi Arabia.
The deal, concluded at the weekend, envisages a cut of nearly 10 million barrels a day of output and concerted purchases by countries including the U.S., India and China for their strategic reserves. However, both crude itself and energy stocks sold off when markets reopened on Tuesday after the Easter weekend.
The IEA’s message was far from being all doom and gloom. Its analysis suggested that demand will start to pick up as early as next month as lockdown restrictions in some countries start to ease. While April demand will be some 29 million barrels a day below year-earlier levels, that will ease to 26 million b/d in May and 15 million b/d in June, it said.
“There is no feasible agreement that could cut supply by enough to offset such near-term demand losses," it argued. "However, the past week’s achievements are a solid start and have the potential to start to reverse the build-up in stocks as we move into the second half of the year."
Indeed, if - possibly a big 'if', given the stress that the pandemic is putting on international cooperation - producers cut as expected, strategic reserves are topped up and demand starts to recover, then the world market may swing back to a deficit in the second half of the year and draw down some of an enormous overhang of commercial stocks that will have built up between January and June.
The IEA said the daily draw on stocks could be 4.7 million b/d in the second half, albeit that still doesn't unwind an average build of 12 million b/d in the first half.