Page 7 - LatAmOil Week 14 2020

LatAmOil COMMENTARY LatAmOil
Global oil storage near capacity
The world’s oil storage facillities have filled up rapidly amid a glut in supply and spiralling fuel demand
WHAT:
With oil prices at mul- ti-year lows, countries have begun looking to store as much oil as possible.
WHY:
The collapse of the OPEC-plus production agreement has sent supply soaring, even as COVID-19 has destroyed demand.
WHAT NEXT:
Unless a severe output cut is introduced soon, prices have further to fall.
THE unprecedented glut in global oil supply has tested storage capacity to the limits, driving the world’s biggest producers to negotiate a truce this week and curb their output.
Oil prices have more than halved this year, as efforts to slow the spread of the coronavirus (COVID-19) pandemic have cut deeply into fuel demand. Expectations are that global oil consumption could plummet by somewhere between 10 and 20mn barrels per day (bpd) this month as a result of lockdowns.
China, the US and others have helped prop up weak oil prices by exploiting the situation to fill up their strategic petroleum reserves (SPRs). But storage space is growing increasingly scarce, leading to dire warnings of a further price rout. In some regions, this could even result in some oil temporarily selling for less than zero.
Oil inventory levels across the world’s storage facilities have climbed to more than three-quar- ters full on average since China began shutting down its refineries in January, Rystad Energy estimated in late March. This means the world has less than 1.7bn barrels of unused onshore crude and petroleum product storage left.
“Theoretically, the unprecedented stock- build might mean negative oil prices in places, should the world or some regions run out of storage and if higher-cost production is stickier than thought,” Citibank warned in a research note this week.
Globally, the International Energy Agency (IEA) has warned that oil inventories will still rise by 15mn bpd in the second quarter, even if Russia, Saudi Arabia and other producers agree to take 10mn bpd of supply offline as planned.
With land storage reaching the brim, oil traders are currently storing as much as 80mn barrels of oil at sea, Reuters reported on April 1. This is nearing the level reached after the 2008 financial crisis, when more than 100mn barrels of oil were temporarily stored at sea following a collapse in demand.
Storage tanks in the UAE’s flagship Fujairah oil hub were reported to have reached full capac- ity for both crude oil and petroleum products at the start of this month.
Fujairah, at the entrance to the Strait of Hor- muz, is one of the Middle East’s biggest storage locations. The Fujairah emirate aims to boost capacity to 14mn cubic metres this year, from 10 mcm previously. To the extent that it is possi- ble, construction work is likely to have been fast- tracked since oil prices collapsed in early March. But the emirate is yet to announce any concrete progress in expanding capacity.
Opening up
The US government has already taken steps to help the country’s producers amid mounting concerns over how they will handle the glut cre- ated by the collapse of oil prices last month.
Last week, it was announced that the US Department of Energy (DoE) would make 30mn barrels of storage in its SPR available with immediate effect, with another 47mn barrels to be made available thereafter. According to the DoE, US President Donald Trump has given instructions to fill the SPR to its maximum capacity. The department is currently gauging interest in the capacity, which it is offering until March 31, 2021.
“Filling the SPR with crude oil, produced by American companies that are facing cata- strophic losses and increased financial hardship, is a logical action for the federal government to take as we work to overcome the economic dis- ruptions caused by COVID-19 and intentional, global oil market disruptions,” US Secretary of Energy Dan Brouillette said this week. “The department continues to work with Congress to find ways to make funding available for DoE to buy American oil. However, we must move with a sense of urgency to support an industry that underpins the US economy and supports our national security. Making some of the SPR’s storage capacity available to industry, without purchasing the oil, provides this immediate benefit to the industry and its hard-working employees.”
According to US Assistant Secretary for Fos- sil Energy Steven Winberg, the SPR will receive up to 685,000 bpd of oil. The first deliveries are anticipated to arrive in late April or early May.
This comes after US pipeline operators 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, however, 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.
“ is growing
Storage space
increasingly scarce, leading to dire warnings of a further price rout
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Week 14 09•April•2020 w w w . N E W S B A S E . c o m
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