US-Iran conflict revives oil supply question


How much oil is in storage in case of a supply disruption?

Over the last week, this perennial question moved front-and-center as the escalating conflict between the US and Iran put Middle East energy infrastructure at risk of becoming military targets.

The situation in the Middle East was the most dramatic in a series of events around the world raising concerns about the security of oil supply.

Turkey’s decision to get militarily involved in Libya’s civil war. A legislative stand-off in Venezuela between ruling and opposition parties. The biggest strike in France in decades. A spat between Russia and Belarus over oil deliveries.

This is quite a shift from a few weeks ago.

Oil demand figured to be the key driver in 2020, similar to 2019 when the US-China trade war cast a dark shadow across global financial markets.

A breakthrough in talks lightened the mood heading into the New Year. The two sides are scheduled to sign a “Phase 1” deal next week in Washington.

That’s bullish for the economy and could help strengthen oil demand.

Wall Street certainly noticed. At the end of 2019, hedge funds accumulated their largest net long position in oil futures and options all year.

They were quickly rewarded, as oil prices jumped the first week of 2020. But the trigger didn’t come from the economy.

The US killing of senior Iranian commander Qassem Soleimani and retaliatory strike on US forces in Iraq injected a geopolitical risk premium.

Brent crude closed near $70 per barrel, a level not seen since September’s historic spike after the attack on Saudi Arabia’s Abqaiq and Khurais field.

Source: IntercontinentalExchange via MarketView

Source: IntercontinentalExchange via MarketView

That incident cut Saudi Arabia’s oil production by half, forcing Aramco to tap its crude inventories at home and abroad to supply the oil market.

The amount of crude in storage will resurface again if production is disrupted. Ursa measures global crude inventories on a weekly basis using radar satellites.

The map below shows MENA crude inventories (floating top tanks) as a percentage of capacity.

The countries shaded blue mean inventories were above 50% of capacity, according to our latest data. Red denotes less than half-full.

Source: Ursa

Source: Ursa

For example, Saudi Arabia’s crude inventories were equal to 58% of capacity for the week that ended January 8. The sites we monitor in Saudi Arabia are Ras Tanura, Yanbu, Rabigh, Al Jubail, Jeddah, Jazan and Khafji.

Just as quickly, the probability of an all-out war faded when President Trump spoke from the White House on January 8, his words interpreted as an effort to de-escalate the crisis.

Oil prices plunged, wiping out the gains since the crisis began. ICE Brent closed January 8 at $65.44/b, a remarkable 9% below the intraday high.

A day later, the crude benchmark closed 7 cents lower at $65.37/b.

Source: IntercontinentalExchange via MarketView

Source: IntercontinentalExchange via MarketView

What’s next? Will oil prices find a bottom?

It’s worth noting the steady rise in oil prices during the fourth quarter of 2019 was aided by solid fundamentals.

Ursa data shows global crude inventories tightened, falling to a year-on-year deficit, when viewed as a percentage of capacity.

Source: Ursa

Source: Ursa

One factor helping inventories draw in 2020 will be the deeper supply cuts by OPEC and its allies effective January 1.

On the flipside, fresh supplies are coming from outside OPEC. Additional production is coming from the Gulf of Mexico, the Johan Sverdrup offshore field in Norway, plus new discoveries in Guyana and Brazil.

Which side will win? The best barometer for the supply-demand balance is global crude inventories. Sign up here for a free evaluation of Ursa’s oil storage product.

There are also some wildcards to consider. At the top of the list is Libya.

A political stalemate between the Tripoli-based Government of National Accord (GNA) and opposing forces loyal to General Khalifa Haftar allowed the country’s oil production to remain around 1 million barrels per day.

Haftar’s goal of capturing Tripoli took a step forward this week his Libyan National Army captured the strategic city of Sirte.

Adding fuel to the flames, Turkey said it will send troops to support the GNA, putting Ankara opposite the likes of Russia, Egypt and the UAE, all of whom back Haftar.

In Caracas, the sight of opposition leader Juan Guido trying to scale a fence to enter the National Assembly could reignite protests against the Maduro regime.

While in France, a long-running strike against pension reform reached the country’s oil refineries, but fuel supplies (so far) remain plentiful.

To the east, a contract dispute between Moscow and Minsk caused Russia to suspend oil deliveries to Belarus. Similar scenarios have before led Russian to stop oil flows to the rest of Europe.

We’ll be following these stories in 2020. You can sign up to receive the Ursa blog in your inbox.




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