Lessons learned: Inventory trends post-coronavirus

AUTHOR

How much longer before the world’s crude inventory storage tanks fill to maximum capacity?

It’s become the dominant question in the oil market after the combination of a global economic paralysis and Saudi-Russia price war resulted in a staggering oversupply.

This mismatch between supply and demand drove oil prices to 18-year lows, and ultimately drove OPEC and Russia back to the negotiating table after a hearty nudge by US lawmakers.

A video conference on Thursday involving major oil producers bore fruit as the parties tentatively agreed to a production cut equivalent to 10 million barrels per day (bpd) or 10% of global supply.

The scale of the cuts is unprecedented. “The biggest one-off cut previously agreed by OPEC alone was 2.2 million bpd during the 2008 financial crisis,” Reuters reported.

Oil prices rallied early Thursday, but closed lower, a sign of the market’s disappointment with the outcome.

Source: ICE Europe

Source: ICE Europe

A final deal took shape over the weekend. The OPEC+ group said it would cut production by 9.7 million bpd after allowing Mexico a smaller cut than originally demanded.

The size of the cut was less than most demand destruction estimates. Trafigura’s chief economist figures demand could fall by 30 million bpd in April.

The dynamics of the situation are so fluid, it’s anyone’s guess how the fundamentals will shake out.

What is certain is crude inventories will remain the key barometer for the supply-demand balance.

Crude inventory data has already yielded insight into how the coronavirus has shaped the oil market on global, regional, country and location basis.

Let’s take a look at some takeaways derived from Ursa’s weekly measurements of crude inventories around the world using radar satellite imagery. 

China

First, the impact on inventories has followed a similar path as the virus itself, starting in China and spreading to the rest of Asia before hitting Europe and the US.

After a period of consistent builds, China’s inventories have flattened suggesting a return to normal economic activity.

Source: Ursa

Source: Ursa

In Shandong Province, home to most of China’s independent “teapot” refineries, crude inventories have fallen the last three weeks after 14 straight builds, indicating an uptick in refinery runs.

Source: Ursa

Source: Ursa

The same trend is visible in Southeast Asia where inventories have eased the last two weeks.

Source: Ursa

Source: Ursa

The next phase of inventory builds will likely shift outside Asia, mimicking the path of the outbreak.

The oil futures market quickly shifted into a massive contango, creating a financial incentive to store barrels in anticipation of oversupply.

Cushing, OK

Last week, stocks at Cushing, Oklahoma — the delivery point for the NYMEX WTI futures contract — jumped more than 6 million barrels.

Source: Ursa (inventory data), CME Group (prices)

Source: Ursa (inventory data), CME Group (prices)

A driving force behind the inventory builds will be refinery run cuts.

From India to Europe and the US, refinery processing rates are dropping.

US Gulf Coast

The utilization rate in PADD 3 (US Gulf Coast) averaged 81.9% last week, the lowest level since 2017 during Hurricane Harvey, according to the EIA.

Source: US Energy Information Administration (EIA)

Source: US Energy Information Administration (EIA)

The depressed demand will be especially apparent heading into summer at a time when refinery utilization typically peaks.

This will also coincide with a huge glut of supply hitting the market. Keep in mind that OPEC and Russia started a price war last month, which resulted in record-high April loadings.

Those crude tankers are sailing the ocean, and when the cargoes arrive a large percentage won’t find a home, but will end up in storage.

Caribbean

One corner of the world that will draw unwanted barrels is the Caribbean.

“The Caribbean offers an attractive storage alternative, provided that capacity can be secured,” according to Sandy Fielden, director of oil research at Morningstar Commodities.

“The Caribbean is strategically located at the crossroads of international crude trade routes between the northern and southern hemispheres as well as the Atlantic and Pacific oceans,” he writes.

Nearby are 56 refineries with 9.9 million bpd capacity and the Caribbean boosts nine deep-water ports capable of serving VLCC tankers, Sandy notes.

Armed with Ursa storage data, Sandy authored this research piece, titled, Caribbean Vacation for Surplus Crude? Island terminals offer convenient access.

Sandy highlighted an example of inventories rising at a pair of Buckeye-owned terminals in Freeport, Bahamas and Castries, St. Lucia.

Source: Ursa

Source: Ursa

As a region, empty storage still exists, but Sandy suspects that will change soon.

“We assume this spare capacity is already leased and should fill up in coming weeks as cargoes are shipped from Gulf Coast and Latin American ports,” he says.

This view can be applied to a broader geographic swath. The logistics of moving vast amounts of oil into storage are considerable.

It’s not surprising that while folks are talking about spare storage running out, the actual filling takes time.

Just take a look at key hubs in terms of capacity utilization:

Source: Ursa

Source: Ursa

The caveat here is that the past isn’t necessarily prologue.

The rate of inventory builds should grow exponentially, as “easy” storage locations are filled, and then slow as  supply turns to spots more difficult to access from a logistics standpoint.

Keep reading this space for updates. If you’re interested in a free data evaluation, please let us know.

#TAGGED

Solutions

49393608

Live count of Ursa Space’s SAR + Optical imagery/data catalog

Learn more about our imagery as a service.

Company

Industries

News