As OPEC & Russia sit down, China’s inventories rise


Could OPEC and Russia agree to cut oil production by enough to offset the loss of demand resulting from the coronavirus?

That question framed this week’s gathering of oil ministers in Vienna, with the outcome no doubt having a big impact on oil prices.

The global crude benchmark plunged more than $18 per barrel (-26%) to almost $50/b from early January to late February.

Saudi Arabia, OPEC’s de facto leader, argued in favor of taking additional steps to control supply in response to the coronavirus outbreak.

It could also be argued that coronavirus doesn’t represent a long-term threat to the global economy. Oil demand will soon recover, making further production cuts unnecessary.

Moscow apparently endorsed the latter view. When Russia and OPEC met behind closed doors March 6, the two sides couldn’t strike a deal, according to news reports.

Stepping back, what makes the coronavirus outbreak serious isn’t just the global nature of the problem, but that the epicenter is China, the world’s second largest oil consumer.

A slowdown is visible in the amount of oil in storage across China. Tanks are filling as refiners cut runs and perform maintenance.

The data below comes from Ursa, which measures global crude inventories on a weekly basis using radar satellite imagery.

Here’s a look at a sample of our China coverage over time. Among these sites, total crude inventories rose by 37.8 million barrels (5.6%) to 708.5 million barrels from the start of 2020 to the week ending March 5.

Since the Lunar New Year (Jan 25), inventories have increased by 30.2 million barrels.

Source: Ursa

Source: Ursa

In this sample, stocks are at the highest level since summer 2019. If the upward trend continues, that mark could be topped in the next few weeks.

One place where inventories are certainly higher is Shandong Province.

Most independent or “teapot” refiners are located in Shandong Province. Unlike state-owned refineries, independent refiners cannot sell products overseas, making them more susceptible to the domestic downturn.

A sample of our coverage in Shandong Province shows a clear trend higher. From the Lunar New Year to present, these inventories have increased by 15 million barrels (+12%).

Source: Ursa

Source: Ursa

For more information, the Wall Street Journal ran an article this week about the increase in unsold cargoes on tankers, as well as onshore inventories rising (citing Ursa data).

Outside China, inventory builds have also been visible in Japan where stocks have risen by 14% since the Lunar New Year.

Saudi Arabia is concerned that unless producers act then inventories could keep building.

Riyadh argued for keeping existing supply cuts of 2.1 million barrels per day (bpd) in place until the end of 2020. Without an extension, this reduction expires at the end of March.

Further, Saudi Arabia lobbied for an additional cut of 1 million to 1.5 million bpd.

Russia wouldn’t publicly support the Saudi position before official talks began March 5-6. That’s happened before, though Moscow ultimately accepted the terms.

This time was different, with Russia refusing to come onboard even after talks began.

Earlier in the week, oil prices tested recent lows, but found support on positive developments.

Source: IntercontinentalExchange, CME Group

Source: IntercontinentalExchange, CME Group

The Federal Reserve cut its benchmark interest rate by 50 basis points, injecting stimulus into the economy which should support oil demand.

Even though the spread of coronavirus continues around the world, there were indications China’s economy is returning to normal.

Almost 300 million people have gone back to work since the Lunar New Year, according to Reuters, based on transportation ministry data.

That’s a sign travel restrictions have been lifted so workers can return. Traffic congestion data from TOMTOM confirmed a pick-up this week.

Another data source, pollution levels, remained below normal suggesting China’s industries haven’t fully restarted.

The pollution data comes from NASA and the European Space Agency satellites.

New York Times video this week illustrated the impact of coronavirus using satellite imagery, part of which leveraged Ursa research on activity at car plants in China and Japan.

If you’re interested in learning how Ursa’s oil storage data can help you keep abreast of oil market fundamentals, sign up for a free evaluation.




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