This article is more than 5 months old

This article is more than 5 months old

Global oil producers have begun shutting down their oil rigs on the largest scale in 35 years as the coronavirus continues to drive market prices to their lowest level since 2002.

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The shutdown of oil wells has already wiped out almost 1m barrels a day from global production, but the figure is expected to rise as producers run out of space to store their extra oil as the crisis continues.

In some landlocked markets in the US, where storage space is scarce and shipping costs are high, oil producers started oil well “shut-ins” late last week rather than pay buyers to take their barrels.

In Canada the price of a barrel of oil fell below the cost of shipping it to a refinery – $5 – making it more economic for producers to shut down their wells than plummet to “negative prices”.

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The international oil price benchmark, Brent crude, has fallen to its lowest level in 18 years, at below $23 a barrel.

The latest price plunge came after Saudi Arabia denied it was in talks with Russia over a truce in the oil price war which earlier this month triggered the fastest oil price crash since 1991.

Saudi Arabia and Russia are preparing to pump record levels of oil into the global market as part of a bitter oil price war to win a stranglehold on the market, despite plummeting demand for energy during the Covid-19 economic crisis.

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The US banking group Goldman Sachs said oil well shut-ins had reached at least 900,000 barrels of oil a day, but “the true number [is] likely higher and growing by the hour”.

“Given the cost of shutting down a well, a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas,” the bank said in an investor note on Monday.

US oil producers shut 40 rigs last week alone, according to a review from engineering group Baker Hughes, the biggest one-week drop since the last oil market downturn battered the US shale industry in 2015. The weekly oil rig count is down 24% from the same week a year ago when 816 rigs were active in the US.

Jeffery Currie, the global head of commodities at Goldman Sachs, said the mothballed oil wells may fail to restart as quickly as the economy recovered from the “coronacrisis”, or at all, which could trigger “a very quick risk reversal towards oil shortages” and cause oil prices to more than double again by next year.

“Not only is this the largest economic shock of our lifetimes, but carbon-based industries like oil sit in the cross-hairs,” he said. “Accordingly, oil has been disproportionately hit.”

“This shock is extremely negative for oil prices and is sending landlocked crude prices into negative territory. Paradoxically, this will ultimately create an inflationary oil supply shock of historic proportions because so much oil production will be forced to be shut-in,” Currie added.

Goldman Sachs estimates that global oil demand has fallen 25% in the wake of the coronavirus outbreak and the price of Brent crude could fall to lows of $20 a barrel.

Norwegian consultancy Rystad Energy said last week that oil prices could fall as low as $10 a barrel if the economic impact of the coronavirus dents global oil demand by 16m barrels of oil a day. The analysts said on Monday it may revise its oil demand forecasts lower from next month.

Saudi Arabia will begin pumping record levels of crude from April, which could lead to further price falls for global oil markets as demand for energy continues to fall.