March 20, 2020 [S&P Global – Published on 19/03/2020] – China’s insatiable appetite for hoarding oil reserves or the expansive independent petroleum storage capacity from Singapore to South Korea will not be enough to absorb the coming flood of crude and refined products, which threatens to push oil prices even lower.
For decades, Asia’s petroleum storage has expanded in the form of underground salt caverns, independent tank farms, operational storage for mega refineries and even oil in pipelines by key oil companies, national oil companies and commodity trading houses alike.
This expansion had a big role in absorbing global oil shocks in the past, such as the 2015-2016 oil downturn when global inventories hit a peak of 5.3 billion barrels in late 2016, according to industry estimates, forcing OPEC to make production cuts to help ease the glut.
But the current market is seeing a rare simultaneous instance of a global supply shock, due to the oil price war between Saudi Arabia and Russia, and a demand shock, due to the coronavirus pandemic, creating an unprecedented oil surplus that stretches storage capability to its limits.
The initial surplus will be seen in refined products as refineries maximize margins on low crude prices.
But there is not much room left after oil companies and traders hoarded compliant fuels in anticipation of the International Maritime Organization’s global low sulfur marine fuel requirements, that took effect January 1. As 2020 rolled in, global shipping was hit by the coronavirus outbreak and demand never materialized, leaving tanks full.
“We saw a big movement of storage towards the end of last year getting ready for January 1st. That storage is still in play,” said Tony Quinn, chief executive at Tankbank International Ltd., in an interview.
“There was a lot of blending going on that’s still happening in my terminals in Fujairah and keeping them very busy. I have both of them 100% contracted and occupied at the moment and the same can be said for terminals I’m aware of here in Singapore,” he said.
Quinn, who is also an operating partner at energy infrastructure investment firm Prostar Capital and a main board adviser to Fujairah Oil Terminal, said initially there was uncertainty around IMO 2020 but by the end of last year, independent terminals filled up on both high and low sulfur fuel oil.
But because of COVID-19 and other demand issues, there was still an awful lot of product that has not moved and stockpiles are at an even higher level than expected.
“So that will probably roll into the third quarter this year before that drops down in to any sort of demand or storage position,” said Quinn.
“I’ve got one of the only two crude oil terminals in Fujairah, but our crude tanks are fully contracted for the next four years. So there is no advantage there. There’s no contango position that can be used in Fujairah for crude,” he added.
Oil reserves, negative prices
With limited product storage, the onus is on countries like China and India that have been building strategic reserves to absorb the huge global surplus.
Citigroup estimated this week that for 2020 as a whole, the oil surplus could be as much as 1.27 billion barrels in the base case and around 2.73 billion barrels in the bear case.
It also estimated that global crude storage capacity may be just over 6.1 billion barrels, including Strategic Petroleum Reserves, of which around 1.645 billion barrels is the effective spare capacity available.
Out of this, 419 million barrels is in the US and 262 million barrels is in China, Citigroup said, adding that Saudi Arabia and the UAE could actually push oil out of storage tanks into world markets in the second quarter, displacing crude in storage tanks elsewhere, and leaving effective spare global crude oil storage capacity at 1.545 billion barrels.
“Putting these seemingly astronomical numbers into context, the world has seen billion barrel stock builds before, albeit over seven quarters, not one,” wrote Ed Morse, Citigroup’s head of commodities, in a note Wednesday.
He said the markets will be headed into a very desperate situation if the world, or even some regions, runs out of storage. If production shut-ins do not happen quickly enough, “we could see negative physical [oil] prices in places, as seen in, say Waha natural gas at times in recent years, due to the lack of takeaway and storage.”
The Waha natural gas price in the US reflects the Permian gas price that settled in negative territory earlier this year due to the lack of pipeline capacity exiting the West Texas basin.
“Supercontangos in most crude oil grades could also -— in what appears to be a return to netback pricing by Saudi Arabia -— push some prompt prices below zero at times, a not uncommon phenomenon when there is no place to put supply,” added Morse.
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