A looming glut of unwanted oil will force producers to shut down wells, slash spending, and fire workers

Stanislav Krasilnikov\TASS via Getty ImagesSaudi Arabia is among the countries expected to ramp up oil supply in the coming months, despite a historic fall in demand caused by the coronavirus pandemic. Here, a Saudi Aramco oil processing facility in Saudi Arabia.

• The coronavirus pandemic is evaporating global demand for oil at a historic pace. This week, it will be down an estimated 26 million barrels per day - or about a quarter of the total demand last year.
• Meanwhile, supply is ramping up at an equally astonishing pace, as top oil-producing nations are expected to flood the market with millions of more barrels per day.
• One research firm calls it "the mother of all oil market supply surpluses" and "one of the biggest supply gluts the world has ever seen."
• It's expected to send oil prices sinking even further and drive oil well shut-ins, which could deal irreversible damage to future supply.
• Visit Business Insider's homepage for more stories.

When the price of oil drops, there's a relatively simple solution to lift it back up, À la Econ 101: Cut supply.

In fact, that's what Russia and OPEC - a group of oil-producing nations including Saudi Arabia - have agreed to do for the last three years, according to several news reports.

Production cuts are even more important when demand for fuel is evaporating at a historic pace, as it is in the wake of the novel coronavirus, which has stunted nearly all forms of gas-guzzling travel.

In a report published this morning, Goldman Sachs said that global oil demand would fall by an estimated 26 million barrels per day (BPD) this week - which amounts to about a quarter of the total global demand last year.

Yet OPEC and Russia aren't cutting supply. They're gearing to ramp it up, which the research firm Rystad Energy says will create "one of the biggest supply gluts the world has ever seen" in a recent press release.

Click here to subscribe to Power Line, Business Insider's weekly energy newsletter.

Demand reaches historic lows

On a normal day in a pandemic-free world, you might take your car to work or jet over to a nearby city.

But to limit the spread of the novel coronavirus - which has now infected nearly three-quarters of a million people worldwide - many governments are advising people to stay home.

That means less travel, less fuel, and, in turn, less demand for oil.

The projections are eyepopping: Global oil demand will fall by about 16 million BPD in April, or by about 16%, relative to the same month last year, Rystad Energy said in an earlier statement.

"Overall, we see the impact peaking in April and then receding through May to September," Chris Page, an analyst at Rystad, said in a webinar the firm hosted last week. "We don't have a lot of good news to report on the demand front even if travel restrictions are lifted in May."

AP Photo/Matthew BrownOil rigs pump oil out of the ground in western North Dakota.

A tidal wave of crude oil on the horizon

Falling demand creates a surplus of oil, which sits unused in pipes and storage tanks around the world.

But that doesn't mean countries are planning to produce any less of it.

In what appears to be a move to outcompete Russia, Saudi Arabia could increase oil output by as much as 25% in April, compared to February, which is when the agreement between OPEC and Russia expires, Rystad says.

"Overall, our expectation is that they will supply 12.3 million barrels for the market, as they've been communicating," Page said about Saudi Arabia.

Meanwhile, Libya, which has stalled production due to a government blockade, is expected to come back online, adding as much as 1 million BPD, he said.

Taken altogether, Page said OPEC Plus countries - which includes OPEC nations and other countries that have agreed to cuts - will ramp up production by 3.5 million BPD in May, to 51.5 million BPD.

He added: The impending glut is "the mother of all oil supply surpluses."

An oil glut sends prices tumbling

"This shock is extremely negative for oil prices and is sending landlocked crude prices into negative territory," Goldman Sachs analysts said in the report.

That's right - with a glut of supply and a shock to demand, oil prices could go negative.

Read more: The meltdown in oil prices could soon see some producers actually paying people to take their oil. Here's how that could play out.

In fact, at least one grade of oil used largely to surface roads called Wyoming Asphalt Sour went negative earlier this month, reaching -$0.19 a barrel, Bloomberg reports.

But whether or not they're negative, the prices are falling fast.

Brent crude, an international benchmark, hovered at just over $22 on Monday morning, reaching 18-year lows, while US crude traded at around $20.

Terry Wade/ReutersA rig contracted by the oil and gas exploration company Apache, which laid off 85 staff earlier this month

Oil companies take a hit

Low prices wreak havoc across the oil and gas supply chain.

Several of the top companies have are already slashed their budgets, laid off staff, and shut down rigs, Business Insider reports.

Read more: Layoffs, furloughs, and spending cuts: We're tracking how oil giants from Exxon to Halliburton are responding to the historic price shock

"This price impact overall has pretty dramatic consequences when looking at year-end levels," Page said.

If a barrel of US crude costs an average of $30 through the end of the year, Rystad says it could shrink US oil supply by 1 million BPD - meaning, some US companies would have to shutter wells because they're just not economical anymore.

In fact, this already happening.

Last week alone, the number of US oil rigs fell by more than 40, according to data from the oil and gas company Baker Hughes. And Goldman Sachs said that these low prices are driving well shut-ins - essentially, when companies turn off the tap of oil, which can irreversibly damage the supply.

"The ultimate magnitude of these shut-ins which is still unknown will likely permanently alter the energy industry and its geopolitics," the bank said.

Get the latest Oil WTI price here.

NOW WATCH: 3.3 million Americans filed for unemployment - and an economist predicts it could be far worse than the Great Recession