By Irina Slav
Global oil storage space is running low, production is not falling quickly enough, and yet last week hedge funds bought a record amount of WTI contracts, Reuters’ John Kemp said Monday. At the equivalent of 122 million barrels, the amount of crude futures purchased last week was the highest since at least last December. According to Kemp, the reason for the increased buying is an expectation of an oil price rebound. The buyers must expect this rebound to take place soon, even though there are no indications to support such an attitude. On the contrary, the latest price moves suggest the opposite. On Monday, West Texas Intermediate dropped by 25 percent to less than $13 a barrel and continued falling on Tuesday in Asian trading, sinking below $11 a barrel.
The United States Oil Fund said yesterday that it would sell all its oil futures for June delivery within four days. That had a lot to do with the drop in WTI prices, and it also had a lot to do with the growing worry about storage space – a worry that did not bother hedge funds and other market-making buyers last week. It may change their mind this week, however.
And with a good reason.
Goldman Sachs yesterday became the latest to join the rising number of oil storage doomsayers. The investment bank said that the world’s storage capacity could reach its limit within just three weeks. This, the bank’s analysts said in a note, would heighten volatility and keep it high until supply and demand rebalances. For this to happen, supply needs to decline by another 18 million bpd next month, as this is the size of demand loss that Goldman expects.
That is much easier said than done, because those additional 18 million barrels per day comes on the heels of a demand loss totaling 29 million bpd, according to International Energy Agency estimates for April.
Producers, though, are cutting.
In addition to the 9.7 million bpd in OPEC+ cuts that should begin next month, U.S. production has fallen by some 600,000 bpd and counting, and Canada has slashed its oil production by 300,000 bpd. Brazil has cut 200,000 bpd off its daily average, Reuters reports.
This is barely above 1 million bpd in production cuts outside OPEC+. While the chances are that U.S. production cuts will likely accelerate in the coming weeks as companies rush to shut in the wells that produce oil at rates higher than the selling price, it may be too little too late.
Global oil storage is filling at a rate of 10 million bpd, according to data from commodities analysis firm Kayrros, reported by the Wall Street Journal. The firm’s chief analyst Antoine Halff called this rate monstrous and warned that if it continues unabated, storage would be full in a little over three months.
Luckily for the industry, the rate of additions has slowed down a bit, Kayrros product manager Augustin Prate told Oilprice.
“Crude demand in China has almost fully recovered, with refinery runs back to pre-lockdown levels,” Prate said.
There is bad news as well but also a glimmer of hope. “In both India and the U.S., refinery runs are 25% below pre-lockdown levels,” Prate said. But “In the U.S., after falling to between 25-45% of pre-lockdown level, traffic in major cities is now up 5-10 percentage points from the low points.”
The United States is among the places where storage space is already tight, so any improvement in demand would be a cause for celebration. Cushing, the country’s largest oil storage complex, added 10 percent last week, to 59.7 million barrels. This is 25 million barrels below maximum capacity, which may sound like a lot. It isn’t if the rate of addition continues.
Enterprise Products Partners earlier this month offered producers space in its northbound Seaway pipeline, providing U.S. oil producers struggling to place their oil near the Gulf Coast the ability to ship their barrels to the storage hub at Cushing.
The problem—for producers and bullish hedge funds alike—is that there isn’t a quick solution to the storage problem. Shutting in wells takes time and even setting wells on fire—which some Russian producers are reportedly considering as one way to reduce output quickly—takes time.
This is time that many smaller oil producers don’t have, so bankruptcies are on the way. This would mean a more lasting decline in production, which is good news for bulls. The question remains whether this decline will happen soon enough. For now, this is highly unlikely, so we may see another massive selloff when the next front-month oil contract nears expiry.
By Irina Slav for Oilprice.com