February 22, 2021 [S&P Platts Global] – Global oil market balances are a blind spot for the market. Despite eye-catching depletions in stocks at key hubs like Cushing and Fujairah, storage is stubbornly high.
China’s uncertain appetite for another barrel-buying bonanza and a pool of excess diesel should keep oil watchers on high alert.
After the April panic which saw Dated Brent collapse to close to $13/b and WTI turn briefly negative, a combination of unprecedented OPEC+ production cuts and record Chinese oil demand pushed the Brent physical oil benchmark to its highest in more than a year at beyond $62/b. The oil market structure is now in its steepest backwardation in a year, pushing current prices higher than later months, and incentivizing the sale of excess barrels.
But while OPEC+’s focus on bringing down OECD oil inventories toward their five-year average appears to be working — they fell for the fifth month in a row in December — this metric masks the bigger picture. China, where stock data is less transparent and falls outside this framework, has not just been buying to consume but also to strategically stash away.
S&P Global Platts Analytics data suggest onshore storage has levelled off in recent months after falling some 147 million barrels from their peaks, with China crude and major oil products bucking the downward trend.
Global crude stocks are still some 200 million barrels above their three-year average, according to Platts Analytics research, while global diesel inventories are back close to the highs reached last spring and summer as COVID-19 lockdowns persist.
Meanwhile, analysts and shipping sources note that floating storage volumes of crude and condensate are proving tricky to shift amid lingering port congestion at Asian refining hubs, having trended lower for much of the second half of 2020.
So trusted regional oil storage trends should be kept in context, such as the fact US total commercial crude stocks are now less than 5% above the five-year average (with the draw concentrated at the NYMEX delivery point of Cushing, Oklahoma). While this is the narrowest supply overhang since April, according to the Energy Information Administration, gasoline stocks are harder to sell.
Meanwhile, oil stocks may be at two-month lows at the Port of Fujairah outside the Strait of Hormuz, according to Fujairah Oil Industry Zone data, but at the same time diesel and gasoil inventories in the Amsterdam-Rotterdam-Antwerp region are some 13% higher than a year ago, according to Insights Global.
So while OPEC+, de facto led by Saudi Arabia and Russia, may see rebalancing the market as a realistic option in 2021 and while the market gets giddy on the near doubling in oil price in the past three months, the storage beast is still to be tamed.
China as Swing Consumer
Analysts are questioning whether China’s crude bumper oil buying of 2020 — which peaked at record high imports of almost 13 million b/d in June — can continue. There has been a notable absence of Chinese demand in February and March trading cycles for Atlantic basin crudes, with sources citing refinery maintenance season in the country, with ample stockpiles and higher crude outright prices limiting sales. The appetite for crude grades Chinese refiners usually favor like Congo’s Djeno and ESPO Blend has waned ahead of key loading programs, sources said.
China’s storage capacity is back around 65%, after briefly breaching the 70% level considered as the maximum in an average crude tank, analysts said.
Indeed, China’s crude imports fell by 15.7% year on year to around 9.1 million b/d in December due to reduced purchases from both the independent refineries and the national oil companies, as China tucked into its own crude reserves amid spiking prices. According to the IEA, the implied crude stock change in China in the fourth quarter was a draw of 565,000 b/d amid lower net crude imports.
“Ample crude quotas and new storage tanks will support crude imports in 2021, but the pace of growth will likely slow substantially,” Platts Analytics said in a research note.
But higher oil prices and deeper backwardation could test the continued import growth or even push China to flood the market, some analysts said, helping to lower oil prices and kickstart further crude purchases.
“Unlike the US, China can use its SPR [strategic petroleum reserves] to influence prices,” said independent oil consultant Anas al-Hajji, pointing out that it “makes more oil available to Chinese refiners and others, reduces oil imports, reduces oil prices, while making significant profit in the process.” China’s SPR is estimated around 400 million barrels by analysts, roughly two-thirds that of US strategic stocks.
While China is planning to add new tanks and expand refining in 2021, the commodity-purchasing powerhouse could decide to become more involved as a swing consumer in the way Saudi Arabia acts as a swing producer.
Al-Hajji notes that in the current oil market structure “OPEC determines the price floor and China determines the price ceiling,” warning that from a game theory point of view OPEC should not help China fill up its tanks when oil prices are low as that can mitigate China’s ability to force a cap on prices.
OPEC+ meets in early March to decide how many barrels to keep off the oil market given questions around how quickly US shale will return and how much China will keep buying at these prices. Balancing the oil market looks as tricky as ever.
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