Continental storage divide
European oil storage struggles as new facilities aid further growth in Asia
In this article, PE looks at the evolution of storage trends in the industry. Part II of II.
European oil storage activity this year has been heavily affected by the market backwardation. By late September, Brent crude futures prices were backwardated by 20-50 cents per barrel for all delivery months, while gasoil futures prices were showing monthly backwardation of up to $3.25 a tonne along the forward price curve. Such structures removed most incentives for speculative product storage.
According to the IEA, European commercial oil inventories declined to 959m barrels at the end of June from 999m barrels at the end-June 2017. The trend towards lower inventories appears to have been consistent throughout Europe, as oil demand was flat over the year and refineries reduced runs in late spring. Unlike in North America, there were no significant shifts in regional storage patterns.
Port of Rotterdam statistics show the reduction in oil activity between the first half of 2017 and the first half of this year. In H1 2018, throughput of crude oil totalled 50.7m tonnes, down from 54.9m tonnes in the January-June 2017 period. Meanwhile, products throughput fell to 40.3m tonnes, down from 42.3m. Interestingly, liquefied natural gas throughput more than doubled to 1.96m tonnes from 878,000 tonnes.
Genscape data show that gasoil stocks in the Amsterdam-Rotterdam-Antwerp (ARA) area fell in June to the second-lowest capacity use recorded since August 2012. Since then, storage levels have recovered, but remain nearly 900,000 tonnes below year-earlier levels. Industry officials say that storage operations appear to be following "normal" seasonal demand fluctuations, but they don't expect the high stock levels of 2016 and 2017 to return until the market's pricing structure returns to contango.
Key storage industry activity over the past year appears largely to have been related to preparations for the expected shift in marine fuels demand toward middle distillates and away from fuel oil. The International Maritime Organisation's (IMO) new limit in sulphur content of marine fuels comes into force in 2020. It's expected that the limit, requiring emissions from the use of marine fuels to be consistent with a fuel sulphur content of 0.5% or less, will trigger major shifts within the 5m-b/d world marine fuels market. Storage operator Vopak says it's working to have all its key bunkering terminals "fully ready to support new market requirements in 2020". In Europe, that will require conversions at its Rotterdam and Hamburg terminals.
40m barrels—decline in European commercial oil inventories in June year-on-year
Despite Vopak's assertions, and while the majority of storage industry and bunker operators contend they are preparing for IMO 2020 regulations, Genscape says it has yet to observe significant upticks in tank modifications. Bunkering industry officials suggest that the process may be slower in many ports because it's unclear how many ships will be fitted with exhaust gas scrubbers. These obviate the need for low-sulphur fuels, and what new product specifications, in particular for new fuel oil blends, may be.
Asia's new facilities
Continued oil demand growth in Asia is supporting the growth of new storage facilities in the region; but, as in Europe and North America, the current backwardated oil price curves are discouraging trader stock building. In Singapore, gasoil price spreads along the forward curve are showing monthly backwardation of 20-60 cents a barrel, while Dubai futures are showing 30-60 cents a barrel backwardation.
Analysts see China as remaining the leading storage development location. A report by analytics company GlobalData argues that China is expected to add 159m barrels of storage capacity by 2022, more than double the 69m barrels increase forecast over the same period for North America. Industry officials suggest that much of the new Chinese capacity will be dedicated to strategic storage. China's status as the world's largest oil importer has made it sensitive to the danger of supply interruptions, illustrated by its current tit-for-tat trade war with the US. The IEA's Oil Market Report suggests that China's net crude stock build for the first half of this year ran at 600,000 b/d, down from 880,000 b/d during the first half of 2017.
Other countries in the region, including Indonesia, Malaysia and Vietnam, are seen as prospective markets because of growing imports and a shortage of refinery capacity. Consequently, international oil tankage firms are consolidating investments in these countries. Vopak, for example, is expanding its storage presence in Indonesia and Malaysia, building on existing terminals in both countries. Vietnam's state PetroVietnam Oil Stockpile Company is building a million-barrel underground storage facility at Quang Ngai, which is expected to be operational in 2020. Trader Trafigura has established a 91,000-cubic-metre facility in Myanmar, which it hopes to develop as a regional supply hub.
An issue hanging over the region's historical oil trading centre of Singapore continues to be the tankage necessary for its active bunkering market, especially ahead of the 2020 IMO emissions regulations. In 2017, bunkering volumes rose 4.2% from 2016, to 50.6m tonnes, but were essentially flat through July this year compared with 2017 levels, at 29.4m tonnes, according to Port of Singapore statistics.
Many economists expect a slowdown in world trade volumes, partly as a result of US trade protectionism; and shipping industry officials suggest activity is lacklustre, so volumes may not recover in the near term.
In a major increase in Asian storage, Oman is reportedly developing a strategic facility at Ras Markaz, with operations beginning in 2020. The storage capacity will eventually rise to 200m barrels. The facility has reportedly generated interest from several Asian countries that are keen to ensure stability of supply in the event of unrest in the Gulf. The terminal is expected to compete commercially with existing storage facilities at Fujairah in the UAE and Sohar in Oman.
This article is part II or II of a series on Storage. Previous article: Global storage not tanked up enough