Global crude inventories have begun to show significant increases caused by an unprecedented drop in oil demand, an outcome of the ongoing economic paralysis.
With Saudi Arabia vowing to supply record-high volumes starting next week, the trend of inventory builds looks set to continue.
How much more room even exists until storage reaches maximum capacity?
Ursa monitors over 4 billion barrels of storage capacity at locations around the world every week. Measurements are calculated using radar satellite imagery.
Our latest data for the week ending March 26 shows the amount of crude oil in storage at 2.5 billion barrels.
That equates to 61% capacity utilization, which is the highest rate since our data began in 2017.
Global capacity utilization ranged from 55% to 59% over this period until March when the upper range was broken a month after inventories began to rise steadily.
The table below shows inventory levels as a percentage of capacity:
The source of inventory builds began in China, as expected, considering the path of the coronavirus outbreak.
China’s crude inventories have increased six of the last seven weeks. One sample of 23 major sites (~1.1 billion barrels of capacity) rose 73.6 million barrels (+10.6%) during that time frame.
Even though China builds have continued, a very modest rise for the week ending March 26 could signal refinery activity has begun to pick up.
Moreover, a key refining region snapped a streak of 14 consecutive weekly builds.
Shandong Province is home to most of China’s independent refineries. The collapse in local demand hit these refineries hard, though media reports indicate processing rates have begun to recover the last few weeks.
Another factor to consider is opportunistic buying at depressed price levels. Even if refinery activity returns, inventories could still rise if China believes the time is right to stock up.
That could explain the significant increase in Ningbo at tanks considered part of China’s strategic petroleum reserve (SPR).
Inventories are increasing elsewhere in Asia, like Singapore, where stocks jumped the week ending March 26 to the highest level on record.
In the Middle East, Saudi Arabia’s inventories have increased significantly, a likely sign of tanks filling in preparation for next month’s supply deluge.
Over the last two weeks, Ras Tanura is up 7.7 million barrels (+23%), while Yanbu is 9.4 million barrels higher (+35%). The two sites are major export terminals on the Persian Gulf and Red Sea.
After Russia rejected an OPEC deal to cut production, Saudi officials pivoted strategies to capture market share. Raise output, drive oil prices lower and bankrupt higher-cost producers, the thinking goes, invoking an all-out price war.
Aramco wants to average 12.3 million barrels per day (bpd) in April. Part of that — 300,000 bpd — will come from tapping inventories.
Tanks have also filled in Egypt, a major transit point for Middle East oil headed to Europe.
The SUMED Pipeline connects the Red Sea and Mediterranean Sea, allowing tankers to avoid the Suez Canal.
Combined inventories at the origin (Ain Sukhna) and end point (Sidi Kerir) jumped to record highs the week ending March 26.
SUMED stocks were 43.4 million barrels, up 8.3 million barrels from the week prior, and the most ever, according to our data.
This could be further evidence of Saudi Aramco preparations for next month. But it also raises the question: who is going to buy all this oil?
Goldman Sachs reckons global oil demand will average 89.5 million bpd in March and 81.3 million bpd in April, down from 100 million bpd last year.
The destination for much of this unwanted oil will be storage.
There is a strong financial incentive to place barrels in storage because traders can capitalize from the market structure.
Oil futures are more expensive for delivery at a later date. As long as the difference is greater than the storage costs, then a trader can make a profit.
The chart below shows the difference between crude oil futures for delivery next month and 12 months down the line.
Storage costs around the world have increased 50%-100%, according to Reuters, as traders compete for available space.
The storage cost per barrel at Cushing, Oklahoma, a major storage hub and delivery point for the NYMEX WTI futures contract, has more than doubled since the last month to 55 cents per month.
However, the price spread is still more than enough to cover the storage costs. At last check, the NYMEX crude’s first-month contract was almost $3/b less than the second-month contract.
There’s room left to fill. Cushing is at 40.6 million barrels (46% capacity), according to Ursa measurements.
But tanks will likely be filling fast, leaving traders looking elsewhere. One preferred location is the Caribbean.
As a region, spare capacity exists (see table above), though talk of brisk leasing activity means this might not last long.
In Freeport, Bahamas, inventories at the Borco terminal equaled 10.95 million barrels (89% capacity) the week ending March 26, up 4.2 million barrels from March 19.
The previous high was 8.1 million barrels set Dec 2017, the same month of coverage of Freeport began. Inventories averaged 5.1 million barrels from Dec 2017 to present.
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