Tuesday, March 22, 2016

Why the global oil glut might not fill swimming pools after all

From @Bloomberg -- One of the warning lights that there’s too much oil around is no longer flashing, adding to signs that global crude markets are finally on the mend.

Just a month ago, oil traders were weighing up whether to park unwanted crude aboard tankers while BP CEO Bob Dudley joked that swimming pools might be needed to hold the excess. Yet instead of offering bumper profits, as in previous market gluts, stockpiling barrels on ships would result in a financial loss, just as it has done for the past six months, in a sign the current surplus may not be as big as feared.

Declining US oil production coupled with disruptions in OPEC members Iraq and Nigeria have helped revive crude to $40, leading the IEA to conclude that the worst of the rout is over. Contrary to expectations that tankers would be needed, onshore storage hasn’t been exhausted.

A crude trader would lose about $7.6 million if they wanted to park 2 MMbbl at sea for 6 months, more than double the loss they would have swallowed in February, according to data compiled by Bloomberg.

The losses from storage partly reflect that hiring a tanker has become more expensive amid robust demand for crude. Day rates on the industry’s benchmark route—to Japan from Saudi Arabia—advanced to $66,641. That’s about 30% more than a month earlier. In dollars-per-barrel terms, the cost of using the ships to store for 6 months advanced to $6.80 from $6.16 over the month.

Yet the economics also give an insight into the oil market itself. Storing crude at sea becomes profitable when the spread between the current price and longer-term ones, known as contango, is wide enough to cover the cost of hiring a tanker.

The gap between first and seven-month futures narrowed to $2.66/bbl on Monday, from $5.07/bbl on Jan. 29, not enough to cover the cost.

It’s a distinct shift from the market conditions prevalent a month ago. The biggest change is oil supply that’s been unexpectedly curbed. A pipeline linking the northern Iraq to the Mediterranean Sea halted in mid-February, while another from Nigeria was hit by sabotage.


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