This week’s oil price crash was historic in scale, with Monday’s price decline ranking as the second-largest ever in percentage terms.
The catalyst came Friday when talks in Vienna between OPEC and Russia failed to deliver a new round of supply cuts.
For three years, this coalition representing 40% of the world’s oil had coordinated to hold supply off the market.
But Moscow decided the time was right to end its relationship with Saudi Arabia and other OPEC producers.
The move was widely interpreted as Russia taking aim at US shale producers. Drive the oil price low enough for long enough and you can cripple a competitor, especially one drowning in debt, the logic goes.
Sound familiar? The last price war that began in 2014 also tried to undermine US shale production.
Yet, despite low oil prices, US shale output kept growing. OPEC eventually stopped fighting for market share, working instead with Russia to restrain output and boost prices.
US oil production has increased to 13 million barrels per day (bpd), an all-time high, up from 9 million bpd in 2014.
After lawmakers lifted restrictions on US exports in late 2015, shale producers could compete abroad.
It took almost two years for exports to begin rising in earnest, which meant from 2015-16 the US was awash with crude.
US crude inventories soared, capturing the surplus barrels circulating in the oil market.
The market structure responded to the oversupply, with oil futures more expensive for later delivery, a condition known as contango.
Contango allows traders to potentially make money from storage, creating an incentive to purchase barrels.
Once again, oil futures are trading in contango, prompting traders to search for available storage onshore and offshore.
This time around, however, the US likely won’t be the epicenter of the storage boom. There is the ability to export and domestic supply growth will likely ease at key shale plays.
Instead, storage hubs outside the US will likely fulfill the role of attracting surplus barrels above and beyond demand.
These inventory sites will become central to understanding the ongoing period of oversupply in the oil market. Unlike before, transparency into crude inventories outside the US is now possible.
Ursa’s global storage product provides reliable, weekly measurements of crude inventories around the world using radar satellite imagery.
Here are some key places to watch:
China: The sheer size of China’s oil storage capacity (the most in the world) makes it vital to understanding the global oil market. Traders and analysts were already scrutinizing China’s inventory statistics in 2020 to gauge the impact of the coronavirus.
Ursa data shows China’s crude inventories have increased by 7% over the last five weeks, coming within a whisker of the all-time high from May 2019.
The builds have been more pronounced in Shandong Province, home to China’s private sector refiners. Shandong inventories have increased by 10% over the last five weeks, hitting an all-time high last week.
Middle East: Saudi Arabia will reportedly supply a record 12.3 million bpd in April, a level so high, it may need to tap crude inventories.
Ursa monitors almost 175 million barrels of storage capacity across seven sites in Saudi Arabia, including export hub Ras Tanura on the Persian Gulf.
Ras Tanura stocks have been 30 million to 37 million barrels in 2020, versus an average of 38 million since our coverage began in 2018.
Saudi Arabia also owns or leases storage overseas, including Okinawa, Sidi Kerir and Rotterdam.
Caribbean: Even though it’s relatively small, the Caribbean is significant because it’s a bellwether for broader market trends. Traders chose the Caribbean to store crude there due to the availability of tanks for lease, deepwater ports and proximity to US markets.
Ursa data shows Caribbean stocks range-bound between 30-35 million barrels so far in 2020. There’s still plenty of room for inventories to fill. Our latest measurements put Caribbean stocks at ~ 31% of utilization for sites we monitor.
We’ll keep updating this story as it evolves. If you’re interested in a free evaluation of our oil storage product, please let us know.