The second quarter of this year will see the largest volume of liquids production cuts, including shut-in production, in the history of the oil industry, the latest assessment on oil markets by London-based global information provider IHS Markit’s Crude Oil Market Service shows.

IHS Markit now expects as much as 17-million barrels a day of total liquids output (which includes nearly 14-million barrel a day of crude oil production) to be cut or shut-in during the period between April and June.

“The great shut-in, a rapid and brutal adjustment of global oil supply to a lower level of demand is under way. All producing countries are subject to the same brutal market forces. Some will be impacted more than others. But there is nowhere to hide,” says IHS Markit Oil Markets head Jim Burkhard. 

IHS Markit expects oil demand in the second quarter to be 22-million barrels a day less than a year ago.

This collapse in demand, combined with low oil prices, storage constraints and government ordered cuts, is driving what is an extraordinary level of liquids production cuts and shut-ins around the world.

North America and the Organisation of the Petroleum Exporting Countries (Opec) members, as well as countries in the Commonwealth of Independent States – particularly Russia – are expected to be the source of most of the production cuts.

Exactly where, why and how supply cuts will take place is a complex matter, IHS Markit says.

“There is no fixed equation. Oil is produced in a variety of environments, which means there is no fixed equation and decision factors vary.” 

However, IHS Markit has identified three key factors that shape production cut decisions.

Firstly, there are technical and logistical factors – including restart complexity.

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 maturity influence how easy or difficult restarting production could be, including whether output could be forever lost or simply deferred. Other technical-related factors are health, safety, and worker availability. Logistical factors are offtake demand, transport options, and oil storage availability.

Secondly, there are financial considerations. These include operating margins, current oil price levels, future expectations of the oil price, financial health of the operator, capital availability and alternative spending options – such as deciding to spend money on other projects.

Thirdly, there are regulatory and contractual conditions. These include ensuring compliance with government requirements for shutting-in wells, government orders to adjust production, and contractual obligations.

Government orders to comply with the Opec+ agreement to cut production fall into this category. Obligation to deliver associated gas (i.e. gas that is produced as a byproduct from a crude oil well) is an example of a contractual condition that could impact production decisions.

For upstream operations that are integrated with downstream assets – such as refineries and petrochemical facilities – downstream market conditions and needs of downstream assets could impact decisions about upstream output, especially when the assets are under combined ownership.

“When it comes to the where, why and how of production cuts, the wide range of technical, logistical, regulatory, contractual, and financial conditions means there is no single set of answers. But under these market conditions, it is pretty clear where production will be cut. Nearly everywhere,” says IHS Markit global upstream oil and VP Paul Markwell.