Oil Glut Appears To Be Getting Worse, Not Better

Back in the spring, oil prices plunged to 7-year lows amid fears that U.S. inventories were going to fill to the brim. As we all know now, that didn't happen - although they did peak at a mighty 490 million barrels.

Fast forward six months, and the global crude market still resembles a saturated sponge trying to mop up an additional two million barrels per day of excess supply. Fears of running out of storage space in the U.S. during the refinery maintenance season have retreated. Instead, a much scarier specter is haunting the oil markets: that of global storage topping out. Some would dismiss this out of hand as preposterous, but read on. Related: Day Of Reckoning For U.S. Shale Will Have To Wait

What started as hints of congestion in early September has morphed into a body of evidence for swelling floating storage. A rapid spike in freight rates in recent weeks for VLCCs (very large crude carriers) was initially interpreted as a bullish phenomenon, driven by surging demand from China.

This was not a wholly unreasonable conclusion to jump to; it is common knowledge that China has voraciously been filling strategic petroleum reserve sites in areas such as Huangdao and Shandong this year. In addition, the Chinese are historically renowned for going on bouts of bargain-hunting amid lower oil prices - an opportunity that the recent swoon in prices has presented in abundance.

But as a build-up of oil tankers outside Chinese ports have proven in recent weeks, the spike in freight rates is not due to a ramp up in demand, but instead due to over-congestion. Wait times outside Chinese ports have lengthened considerably, although producers have the consolation that those barrels are already committed to an end-user. Related: The End Of The European Refining Boom Or Just A Pause?

The situation in the U.S. Gulf is not much different. Over the last couple of weeks, vessels have been sitting at anchor for longer before off-loading. This has pushed the total overhang sitting off-shore in the Gulf close to 20 million barrels, double the usual volume that is waiting to discharge. To put this into perspective: This is an entire week's worth of imports for Gulf Coast refiners.

Further signs of oversupply have come in the form of idling vessels, laden with crude, sitting off the coast of Singapore. This indicates one of two scenarios: either no buyer can be found for the crude, or that the buyers have no place to store it. This anomaly was even alluded to by the IEA in their monthly oil report out earlier this week, highlighting that oil at trading hubs in Europe and Asia is being stored on ships, even though the economics don't seem to justify this move. Related: A New Era For Canadian Oil And Gas, For Better Or Worse

But the most startling sign that global inventories could be full is being pointed to by activity - or a lack thereof - in the Arab Gulf. While a recent drop in West African crude loadings can be explained away by the lack of vessel availability due to the traffic jam in Asia, what is less easy to justify is the number of oil VLCCs idling in the Arab Gulf. Our ClipperData shows seven cargoes holding 13 million barrels of crude in this area, seemingly in a similar fashion to Singapore; there is either an absence of buyers or storage capacity. Or both.

What started with congestion in China now appears to be a traffic jam stretching half way around the world to the Arab Gulf. The best case scenario is that this is a temporary phenomenon caused by strong fall global refinery maintenance season. But even if this is the case, it serves to highlight that the current global oil glut appears to be getting worse, not better.

By Matt Smith

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