Page 9 - NorthAmOil Week 14

NorthAmOil COMMENTARY NorthAmOil
started asking producers to scale back output in response to filling storage tanks in recent days amid concerns that the country would run out of spare capacity. Warnings had also been sounded over the US’ capacity to handle an unexpected surge of oil going into storage.
“The infrastructure is not built to handle a 20-25% overnight collapse in oil demand,” an IHS Markit vice-president and head of crude oil research and energy and mobility research, Jim Burkhard, was quoted as saying. He added, how- ever, that there were reasons for an oil company to keep producing rather than to shut in output. For example, shutting down production may damage a reservoir, while smaller operators may also opt to keep rigs running in order to ensure at least some cash flow.
Filling the tanks
China, the world’s biggest oil importer, is report- edly gearing up to fill its SPR with cheap crude. Bloomberg quoted unnamed sources on April 2 as saying that the central government has directed its agencies to quickly co-ordinate the stockpiling and that in addition to state-owned reserves the government might look to use com- mercial storage space.
The newswire added that the initial target was to hold government stockpiles equivalent to 90 days’ worth of net imports, before eventu- ally expanding this to 180 days once commer- cial reserves are factored in. China imported 10.14mn bpd in 2017 and 10.7mn bpd in the first two months of this year. Imports climbed in the January-February period despite demand slumping as the government began restrict- ing commercial activity and travel amid the coronavirus.
The sources added that the government was intending to announce a fourth wave of new SPR facilities. While the government has not provided an official figure for its SPR levels since December 2017, when it said stockpiles stood at 37.73mn tonnes (276.56mn barrels) as of June 2017, National Energy Administration (NEA) head of development and planning Li Fulong said in September 2019 that country had around 80 days’ worth of oil in its SPR and commer- cial stockpiles. China’s imports in the first eight months of 2019 averaged 9.9mn bpd, suggesting
the government had access to around 792mn barrels.
Wood Mackenzie said on March 23 that oil stored in both SPR and commercial facilities could climb from an estimated 900mn barrels in storage in 2019 to 1.15bn barrels this year. This would be equivalent to 113 days of imports based on 2019’s import figures.
China is not the only Asian importer think- ing about filling its oil reserves, with Bloomberg reporting on April 8 that India had also commit- ted to filling its SPR with cheap oil. Unnamed officials told the newswire that the move served two purposes – taking advantage of the oil price crash while also serving as a show of support for international efforts to stabilise the oil market. India’s oil storage capacities are much smaller, however, amounting to just 5.33mn tonnes (39mn barrels).
State-owned PetroVietnam has also said it will begin looking to import oil for storage while prices are low.
What next?
Oil importers can only store so much oil before they run out of space, with some Chinese refiners reportedly being on the verge of running out of space in February. Sinopec noted late last month that it expected Chinese oil product demand to show “negative growth” during the first half of the year. While the country is lifting its lock- down there are two factors that could undermine domestic demand.
First, Chinese export-orientated indus- tries will struggle to ramp up to full capacity until lockdowns in other parts of the world are lifted. Second, while social-distancing measures have been eased, they could easily return if the number of new COVID-19 cases begins to rise. China’s public attractions were swarmed in the immediate wake of the restrictions being lifted this month. Hong Kong experienced a similar situation in mid-March and had to reinstate restrictions after the number of new infections began to climb again.
If oil production is not cut severely then it will not be long until strategic and commercial reserves are full, at which point the next price crash could even see crude benchmarks trading at single-digit figures.™
US pipeline operators started asking producers to scale back output in response to filling storage tanks in recent days.
The US is making storage capacity in its SPR available in an attempt to help domestic producers.
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