Approaching tank tops to further pressure oil
Two analysts agree that crude oversupply will exhaust storage space in a matter of weeks
Cargo tracking specialist Kpler and Oslo-based consultancy Rystad Energy both predict spare capacity in global crude storage fully filled well before the end of May—a scenario that is likely to plunge oil prices ever lower.
The firms’ views on how much capacity, not including floating storage, remains available is broadly similar. Rystad estimates that 875mn bl is left to fill. Kpler comes to a slightly lower figure of just under 750mn bl but concedes that there could be upside to that.
It actually sees as much as 1.6-1.7bn bl of nameplate storage capacity still unfilled but is concerned that this includes facilities that are beyond practical use due to age or length of time since they were last in service. It bases its calculations on the highest levels of inventory seen at all facilities it monitors within the last three years. And it concedes that, given the appetite to store, this may be a conservative methodology in current times.
There is slightly greater variation on exactly when tank tops will be hit, mainly due to differing estimates of exactly how great the global oversupply is. Rystad sees supply outstripping demand by around 16mn bl/d, leading to a forecast of c.50 days to exhaust all storage capacity. That would translate to no additional storage being available by mid-May.
Kpler puts the oversupply at a higher 22.5mn bl/d (including additional Saudi Arabian production due from the start of April), meaning that tank tops would be hit by the end of April. But even that timescale may be longer than reality, given that there is a risk that logistical challenges may prevent every barrel reaching every available tank.
China juggling act
China poses a particular challenge in Kpler’s view, which is crucial as the cargo tracker sees it having 180mn bl of the available storage capacity, 50pc more than the 120mn bl still unfilled in the US, the next largest capacity holder. Japan, with 55mn, and South Korea, with 35mn, are third and fourth.
Rystad sees supply outstripping demand by around 16mn bl/d
China is likely to be keen to fill as much of its storage capacity as it can, says Kpler’s head of market analysis Alex Booth. The country has “historically had a very strong appetite to purchase crudes at a flat price that they think is acceptable”, and current prices are likely to meet that criterion.
“You do, though, come across potential constraints around logistics,” says Booth. “How do you actually get the oil into the right places? Is it going into SPR, is it going into commercial [storage]? Do the right entities have the right kind of buying licences, permits and volume allocations to take advantage? Obviously, that is something that would have to be worked through in order to make it happen in any very large volumes over and above those that have already been applied.”
Another variable is floating storage, which Kpler currently estimates at just over 100mn bl, or around 10pc of a total 1bn bl of crude on the water. Admittedly, some 65mn bl+ of this is Iranian (40mn bl) or Venezuelan (26mn bl) and only c.40mn bl of it is available to the market. But Booth argues that this is somewhat irrelevant — the market will not be calling on these barrels imminently, rather it needs to understand how much more could be stored at sea.
The answer, he says, is in theory around half the capacity of the global fleet. All of the ballast vessels could come into service as storage —“it is just a matter of cost,” says Booth.
But the current structure of the oil curve is not particularly favourable for a large-scale expansion of floating storage. And, if there is debate on how committed Saudi Arabia is to its price war, its actions in the tanker freight market could be instructive. “The recent actions by Aramco in terms of fixing many vessels and the huge rise in freight rates have made it very difficult with current structure to be looking at adding more floating storage vessels,” says Booth.
Refined products storage is a further part of the puzzle. Both Kpler and Rystad agree that the clean product under most pressure is jet and, due to the need to protect it from contamination and ensure its performance in planes, it is largely unsuitable for long-term floating storage and must therefore fill up limited remaining capacity in fixed storage. Kpler sees jet cargoes heading to the Caribbean to go into storage there.
For other middle distillates, gasoil and diesel, floating storage capcity is almost “infinite”, says Booth “It is just a question of the economics. We have certainly seen in the past VLCCs of middle distillates being stored when there has been the structure to incentivise it.
“It is more difficult on a macro level to assess—using the techniques for crude oil—exactly how much product there is in tank. But what this increasing interest in floating storage for products does point to is the fact that we could be hitting limits on shore.”
Rystad agrees. Due to a collapse on global road fuel demand, refineries are cutting output “because storage is full”, which will lead to “drastic” price movements in gasoline, says the firm’s head of analysis Per Magnus Nysveen. “In some areas, there is no more space in jet fuel storage tanks,” he continues.