As US crude supplies rose lower than initially anticipated, markets reacted by raising above $56 a barrel — the highest for the year so far.
This news of lower growth in supplies has also been seen by some to be a sign of global economic revival and demand recovery. Companies in the US cut fewer workers than economists forecast, indicating to some that the worst of the recession’s job losses may have passed. Not everyone is definitely ready to concede the global economy was already through the trough, yet some are starting to see light at the end of the tunnel. The debate goes on.
And in the meantime, interestingly speculators also seem piling into oil — one of the first signs of economic recovery.
However, despite this, the overall picture for the crude markets is still not rosy. A new variable — floating oil — is incrementally impacting the global equation. A massive floating oil inventory is haunting the crude markets. It is deferred supply, an almost ethereal source of oil waiting offshore. As long as it is unused, it is effectively acting as a support for the market.
Oil companies are storing a record volume of oil at sea in giant tankers. Shipping analysts say around 100 million barrels of crude and about 25 million barrels of refined products, such as gas oil, are held in fleets of Very Large Crude Carriers (VLCCs) in Europe, West Africa, the US Gulf and off Asian ports.
With tanker rental rates low and on-land oil stocks near record levels, it is now apparently cheap to store oil at sea, and using ships gives oil traders more flexibility than long-term storage tanks. The last time floating oil stock levels were anywhere near these levels was in the early 1990s after the first Gulf War. Tanks were drained then into a rising market, and traders and analysts say only a rise in demand will clear the stocks now.
Rotterdam, Europe’s largest port, is already running out of space to store crude as global oil demand posts its first back-to-back annual drop in a quarter-century.
Rotterdam can store 11.9 million cubic meters of crude, port data from 2007 show. That’s equal to about 75 million barrels or enough to supply the 27-nation European Union for about five days.
The harbor is Europe’s largest refinery center and a trading hub for refined products, such as gasoline and diesel. On-shore storage tanks for oil products here are either full or have no unreserved space available and, in view of the space constraints, ships have been diverted or are waiting outside the port until space is available. Total OECD inventories of oil continue to build and are nearly back to the highs of the decade, last seen in 2006.
Analysts calculate that the total of around 125 million barrels of oil stored at sea is equivalent to about 2.85 days of forward demand for the 30 OECD countries. The International Energy Agency (IEA) estimated in its last monthly report that on-land stocks were already equivalent to 61.6 days of forward OECD demand. Adding the floating storage pushes OECD stocks up to 64.45 days — exceptionally high by any measure. This is indeed a source of real concern to the oil producers.
Historically, the general rule has been that 50 days of forward cover is mega bullish for oil prices, 53 days is bullish, 57 days bearish and 60 days mega bearish.
And this is impacting the markets too, restraining the bulls, to a great extent, especially since there is little chance of a quick recovery in oil use as the world faces its worst recession since World War Two.
And the falling OPEC oil supplies needs to be seen in this perspective. In the month of April, the OPEC oil supply fell for an eighth consecutive month, a recent Reuters survey confirmed. Supply from the 11 OPEC members bound by output targets declined to 25.52 million barrels per day from a revised 25.63 million bpd in March, the survey added.
OPEC has till yet made 84 percent of supply cutbacks promised since last year, one of its highest ever rates of adherence. Disruptions in Nigerian productions also seemed to have aided OPEC in higher than normal compliance with its stated output cuts. Despite all its efforts, weak demand and rising stocks underline the scale of the task OPEC has in hand in boosting the market.
With world oil demand forecast to fall this year by much more than previously expected, the prospects are not very rosy indeed.
“We have an inventory overhang which is quite impressive and an incredible build of oil at sea,” said Harry Tchilinguirian, senior oil market analyst at BNP Paribas SA in London. “We may have a correction from here.”
The floating oil lake is now so big that it is likely to keep a lid on prices for some time to come. And thus despite the recent upsurge, signals for the time being continue to be overly bearish — unless the global economy climbs out dramatically of its current depths. And this is indeed a very big if!
