August 16, 2019 [Hydrocarbon Engineering] – Paul Hickin, Associate Director at Platts, will discuss the oil market and its global supply and demand balances at Tank Storage Asia 2019. The event will be celebrating innovation when it returns to Singapore’s Marina Sands Expo & Convention Centre on 25 and 26 September 2019. Here, he provides an overview of his seminar.
The oil market is delicately poised. On one side of the ledger there are concerns as to whether supplies will be sufficient, as analysts raise questions around the alacrity of US shale growth, heightened geopolitical risk and OPEC’s determination to cut output beyond the end of 2019. On the other side of the ledger, there are concerns regarding actual demand, with fears over the global economy and persistent trade tensions. OPEC’s growing spare capacity and global strategic oil storage will play increasingly important roles in countering these uncertainties.
In an exclusive interview with S&P Global Platts earlier this year, the International Energy Agency’s (IEA) Executive Director, Dr Fatih Birol, highlighted how geopolitical tensions in the Strait of Hormuz, Libya and Venezuela, for instance, plus the trade tensions between China, the US and other countries, have created new levels of uncertainty. “Geopolitics has become a key factor for oil markets and will be one for years to come. I would like to see oil markets determined by market forces rather than such developments”, he added.
Oil stocks have been healthy and have helped insulate the market in the first half of this year. That contrasts most notably with the second half of last year, when prices climbed towards US$86/bbl as a result of jitters around sanctions on Iran, before plunging to US$50/bbl due to oversupply fears, as Saudi Arabia pumped at record levels.
But with OPEC’s pact showing real determination to rebalance the market by bringing down stock levels to their five-year average via their 1.2 billion bpd production cut deal, the oil market could still be vulnerable to volatility. This makes spare capacity and oil storage key.
Spare capacity is the most effective and dependable area from which markets can bring sustainable production volumes online to replace supply disruptions elsewhere. It played a significant role in stabilising oil markets during previous periods of major supply outages, such as in 1979 and 1990, when there were oil shocks due to the Iranian Revolution and Gulf War.
Global spare capacity is currently well below the levels of those periods, even with OPEC’s production cuts in place, and so in that respect, markets are relatively susceptible to an outsized, disruptive, geopolitical event.
The IEA estimates OPEC had some 3.16 million bpd of spare production capacity available in the second quarter of this year, with more than 2 million bpd of that held by Saudi Arabia. That equates to just over 3% of global demand. While this spare capacity is low in the broader scheme of things, it is a recovery in the sense that just 1.91 million bpd of spare production capacity was available in the final quarter of last year.
Russia also has some spare capacity given its part in the OPEC production cut deal and there are strategic and emergency oil stocks that act a little like spare capacity, but these have important differences. Under IEA and EU rules, member countries must maintain emergency stocks of crude oil and/or oil products equal to at least 90 days of net imports or 61 days of consumption, whichever is higher. This regulation was very effective in insulating customers from the 1 million bpd Druzhba pipeline fiasco earlier this year when contaminated crude from Russia meant European buyers had to tap reserves.
The US holds close to 650 million bbl of crude in its emergency fuel storage, known as the Strategic Petroleum Reserve, which can meet the nation’s demand for over a month. Key consumers of Middle Eastern crudes, India and China, have also looked to bolster oil stocks.
The IEA has reacted to the latest developments in the Strait of Hormuz – which carries a fifth of all global petroleum liquids consumed through its waterway – by noting emergency oil stocks can cover supply disruptions for an ‘extended period.’
But while the IEA talks up the supply at hand, including the emergency stocks and additional supply growth from US shale, Canada, Brazil and elsewhere, markets understand they may not be sustainable. For example, when the US and IEA acted in coordination to replace the disrupted Libyan supply in 2011, the duration of the resulting price relief appeared limited.
Indeed, there appears to be plenty of oil around to counter any shortage, but spare capacity will be closely watched by a market beset by geopolitical risk and an opaque supply and demand picture.
Paul Hickin is one of over 20 world-leading industry experts speaking at Tank Storage Asia 2019. For more information on attending the conference, visit Tank Storage Asia | Visitor Registration
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