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Squeeze on oil trading spreads to Fujairah as storage fills up
With the coronavirus choking fuel demand and the world awash with surplus crude, even the Middle East’s main oil-trading hub has run out of room to store unwanted barrels.
UAe
WhAt:
Oil storage at Fujairah has filled up.
Why:
The drop in demand for oil has forced traders to turn to storage to balance supply and demand.
WhAt next:
Hopes are concentrated on the end of the coronavirus and a pick- up in demand, but this may be far off.
TERMINAl operators at Fujairah in the United Arab Emirates say they are turning down requests from traders and refiners to store crude and refined products, whereas a year ago they had ample space. The port’s 14mn barrels of commercial crude-storage capacity is just a frac- tion of what Saudi Arabia and Abu Dhabi pro- vide for their state oil companies.
Without tanks to lease, traders face costly constraints on their role as matchmakers who link a specific supply in one location with a will- ing buyer in another. The global oil glut is mak- ing it harder for traders to even out imbalances in the market, and the plunge in crude, down about half this year, is making matters worse.
“If tanks are leased or blocked, then traders needtopushbackontakingcrude,”saidEdward Bell, senior director for market economics at Emirates NBD PJSC in Dubai. That, in turn, could force production in some places to halt, he said.
Demand for storage, an unglamorous but essential link in the global energy supply chain, is at its highest in years. From Singapore to Okla- homa, tanks are brimming with crude, gasoline and other products, nowhere more so than in Fujairah, a gateway for shipments from the world’s most prolific oil-producing region.
Even a deal between oil producers to trim output by 10mn barrels per day (bpd) will not ease the storage crunch at Fujairah. Wrangling between OPEC and its partners continued for a fourth day on Sunday, with Saudi Arabia trying to persuade Mexico to make proportionate cuts to reach a final agreement.
While such a cut would partly offset lost crude demand, Trafigura Group sees oil con- sumption plunging by as much as 35mn bpd – roughly a third of normal global output – as countries prolong lockdowns over the coronavi- rus (COVID-19).
Fujairah, which is situated on the Gulf of Oman, has cemented its position in the world’s oil-storage and supply network over the last 30 years. It started out as a refuelling station for tankers shunting crude from the Persian Gulf to refineries in China, the US and elsewhere. It also built tanks where traders could stockpile fuels.
As state producers Saudi Aramco and Abu
Dhabi National Oil Co. (ADNOC) boosted refining capacity and started their own trading units, Fujairah’s storage operators benefited from the increasing volumes of crude and refined products flowing to and from the Gulf. Now that refineries are processing less crude and many of the world’s vehicles and aircraft are at a standstill, those regional flows have dwindled.
Stockpiles of fuel oil and other heavy distil- lates at Fujairah swelled more than 30% in the past year to 15.4mn barrels, according to the Fujairah Oil Industry Zone; local authorities do not provide inventory data for crude oil. Two projects to add more than 62mn barrels of stor- age will not be built until next year at the earliest.
Wider afield
Since mid-March demand has fallen further thanks to lockdowns, more flight groundings and travel restrictions; there are reports about onshore tanks filling up, with at least one major hub – Saldanha Bay in South Africa – almost full now. Space is quite literally running out.
Unfortunately, even a global deal may not be enough for the physical market. A deal could prop up prices, but it will not magically revive demand, which may have fallen by as much as 30%, or 30mn bpd, already.
There is a glimmer of light on the horizon, however. China is tentatively returning to nor- mal. Refiners are once again buying oil. It is way too early to say how long China’s full recovery will take, but the renewed interest of Chinese buyers in oil is a cause for hope that the night- mare will end eventually.
The world’s crude oil storage capacity may, however, fill up next month because of coronavi- rus-related weak demand and rising oversupply, OPEC Secretary-General Mohammed Barkindo said last Thursday.
Meanwhile, the US government has taken steps to help the country’s producers and the Department of Energy (DoE) said it would make 30mn barrels of storage in its SPR avail- able with immediate effect, with another 47mn barrels to be made available thereafter. Accord- ing to the DoE, US President Donald Trump has given instructions to fill the SPR to its maximum capacity.
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