The world will run out of places to store oil in as little as three months, according to an industry consultancy.
IHS Markit said current rates of supply and demand mean inventories will increase by 1.8 billion barrels over the first half of this year. With only an estimated 1.6 billion barrels of storage capacity still available, producers will be forced to cut output, because by June there will be no place left to put the unwanted crude, it said.
The oil market has been hammered by falling demand as a result of the coronavirus pandemic, and as Saudi Arabia vows to flood the market with crude at deep discounts, following the collapse of the coalition of the Organisation of Petroleum Exporting Countries (Opec) and allies including Russia.
On Thursday, Pakistan banned imports of crude and fuels because its storage sites were full. Vitol Group and Gunvor Group, two of the world's top merchants, say there is heavy interest in storing while several traders have booked supertankers to hoard barrels at sea.
Supply may exceed demand by 12.4 million barrels a day in the second quarter, with traders, banks and consultants also forecasting bumper surpluses, IHS said. Vitol said on Wednesday that demand has fallen by as much as 20 million barrels a day from last year.
"Production is going to have to be reduced or even shut in," said Mr Jim Burkhard, head of oil markets at IHS. "It is now a matter of where and by how much."
There are already signs, in prices, of a potential scarcity of storage space. In the United States, the so-called West Texas Intermediate cash roll traded down at the lowest level since December 2008 on expectations that inventories at the delivery point for US futures would balloon in the coming weeks and months.
Brent futures are trading deep in a contango structure where spot prices are at discount to those in later months as the market tries to create the necessary financial incentives to store by pressuring near-term prices.
Measures of the physical market for actual barrels of crude are also pointing to weakness globally.
Of the world's three largest oil producers, Russia has the least amount of available storage capacity, at about eight days, IHS said. Those figures are based on the amount of production that could be stored if exports dried up. Saudi Arabia has 18 days, and the US has 30.
Nigeria, the biggest producer in Africa, is the most vulnerable among the areas measured by IHS. Estimated first-quarter 2020 daily production of 1.9 million barrels a day would fill up available local storage in 11/2 to two days, the firm said.
China, the world's largest importer, added about 2.5 million barrels a day to storage in January and last month as refineries cut run rates at the peak of the country's virus response, according to Wood Mackenzie consultant Lei Sun.
The nation will likely continue to add oil to its strategic reserves this year, but is running out of space and can probably sustain daily additions of only 300,000 barrels for the rest of the year.
Consultant Energy Aspects also sees storage tanks filling up in the coming months. "With Opec pushing output to record highs, inventories will quickly get out of hand," the firm said in a note.
"We will run out of crude storage capacity by early third quarter of 2020, with product containment arriving earlier."