As entire industrialized countries remain in lockdown amid the COVID-19 pandemic, the IEA has warned that demand for fuel could drop to lows not seen since 1995.

In fact, even if the restrictions on travel are lifted in the second half of the year, demand for fuel is still expected to drop by over 9 million barrels a day, wiping out nearly a decade of demand growth.

This rapid decline in demand is fast creating an oversupply issue on a global scale and, as a result, the world’s traditional oil stores are near breaking capacity.

With travel and economic activity across the world remaining restricted, supply is predicted to continue to outstrip demand by 19.5 million barrels per day in May. So where does the oil industry go from here?

The recent agreement by the OPEC+ cartel to cut their production output by 9.7 million barrels a day is a strong step. However, the stock build up from the first half of the year still threatens to saturate storage capacity.

The 45 million-barrel Saldanha bay oil storage terminal has previously been a crucial outlet for excess crude in periods of reduced demand. However, the facility is already close to full, emphasizing how the oil industries capacity for storage is being pushed to new limits.

With many ‘on-land’ stores already at capacity, the sector is turning to tankers, either to transport or secure the commodity at sea. It is already estimated that as many as 200 supertankers are set to be used as floating storage for up to 12 months.

The last time tankers were used as storage vessels to this extent was back in 2009 when traders held over 100 million barrels at sea, before re-introducing stocks to the market when the economy started to recover. The hope is that a similar process will play out, however, with the extreme demand shock to energy markets escalating over just a matter of weeks, oil companies must assess all operational costs.

In some cases, oil producers are considering paying buyers to take the commodity off their hands. In the long run this may prove less costly than shutting down and re-booting oil extraction projects or restoring to well shut ins.

The reality of this situation hit ahead of the May WTI contracts closing last month when the price of US crude oil turned negative for the first time in history, crashing from $18 a barrel to -$38. The outcome exposed that the recently agreed supply cuts do little to solve the near-term oversupply problem in the global market.

As rising stockpiles threaten to overwhelm facilities, the concern now is that the emergence of negative oil prices may trigger some oil producers to temporarily shut down operations, with continuing slumps in demand expected to influence trading based on June WTI contracts.

The fact that contracts for June delivery of WTI are trading positively is encouraging. However, it cannot be taken as an assurance that the market will not experience a similar price collapse upon June’s expiry if demand hasn’t increased over the next few months.

For now, storage capacity, both on land and at sea, continues to be tested like never before and as that process continues, it will keep exerting downward pressure on global oil prices.

Whilst the current inventory overhang is already encouraging energy market participants to reflect on the challenges and associated costs of storing oil, it is simply too early to determine what lasting impact this unprecedented period will have on the oil industry.

Ultimately, it will take a recovery in demand to turn the market around and that will depend on how the current health crisis unfolds.