The rebound in oil prices is still not here, and new data suggests that it will take some more time before the markets start to balance out.
Global supplies are still too large to justify a significant rally in oil prices. The latest indicator that the glut of oil has yet to ease comes from the FT, which concludes that there is 100 million barrels of oil sitting in oil tankers. Oil has piled up in tankers that are floating at sea, as onshore storage space begins to dwindle.
The level of crude oil stashed at sea is nearly double what it was earlier in 2015. “Onshore storage is not quite full but it is at historically high levels globally,” David Wech of JBC Energy told the FT. “As we move closer to capacity that is creating more infrastructure hiccups and delays in the oil market, leading to more oil being backed out on to the water.”
Rising levels of crude stored at sea has more to do with shrinking capacity onshore, rather than traders stockpiling volumes in order to profit from an eventual rebound in prices. Oil tanker rates have surged this year, so it doesn’t exactly make sense to store oil at sea strictly for a trading opportunity. Daily rates for very large crude carriers (VLCCs) are around $60,000 per day, although down from a peak of $111,000 per day hit on October 8. The collapse of crude prices over the past year have contributed to a surge in tanker rates – while volatile, VLCC daily rates consistently ran as low as $20,000 over the last few years.
The contango situation in oil markets – in which front month contracts are cheaper than delivery at some point in the future – is growing, but not quite large enough to justify storing oil at sea. The premium for delivery at six months in the future compared to today is $4.50 per barrel, but the FT estimates that it may need to rise to $6 in order for the trade to make sense.
Thus, the run up in floating storage has more to do with a scarcity of available storage space on land. In fact, the CEO of Euronav, a tanker company, told the FT that traders are even asking his company to slow down the movement of tanker shipments in order to assist them in managing storage levels, effectively parking some oil at sea. VLCC tankers are sitting at several ports in China, and more than a dozen VLCCs are also sitting offshore in Malaysia, Indonesia, and Singapore. A backlog of tankers sitting in the U.S. Gulf of Mexico is also rising.
The brimming levels of storage at sea mirror the rising onshore figures for crude oil storage around the world. In the U.S., crude storage levels hit 487 million barrels in early November, closing in on the 80-year high of 490 million barrels hit earlier this year. And OPEC reported that crude oil stockpiles in OECD countries currently exceed the running five-year average by 210 million barrels. Storage is now at the highest level in at least a decade. OPEC said the cause is rather simple. “The build in global inventories is mainly the result of the increase in total supply outpacing growth in world oil demand,” the group concluded in its latest monthly report.
The glut suggests the oil price downturn is not over. In fact, rising production from places like Iraq is offsetting the declines in the U.S. shale patch. Bloomberg reports that at least 10 oil tankers from Iraq are set to arrive on U.S. shores in November, a delivery of around 19-20 million barrels. That is the largest delivery in such a short period of time since June 2012, and it is about 40 percent more than the amount sent in October.
The flood of Iraqi crude will put further pressure on U.S. producers, as the fight for market share could push down oil prices. Iraq is producing near record levels, with rapid gains in output over the past year.
The U.S. has lost about 500,000 barrels per day in production since peaking in April, but Iraq has increased output by about 600,000 barrels per day over the same timeframe (although monthly totals ebb and flow). Iraq is now producing over 4 million barrels per day, sharply up from an average of 3.2 million barrels per day last year.
Persistently low oil prices will lead to a deeper contraction in U.S. production. Rig counts continue to decline, despite the brief uptick over the summer. Pioneer Natural Resources, for example, has scrapped plans to add more rigs through the rest of this year. Pioneer had plans to add 2 rigs per month for the rest of 2015, but has shelved those plans after adding eight between July and October.
In short, oil prices could remain subdued because of ongoing excess supply, likely forcing deeper pain on U.S. producers.
By James Stafford of Oilprice.com
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