Oil production excess running at 20 million barrels a day as storage options tighten

Bloomberg/Fuel Fix:
The world’s oil tankers are being filled with crude at a record pace as the options to store a glut on land rapidly diminish, one of the industry’s largest owners said.

A combination of surging production from key producers worldwide and capitulating demand in the face of the coronavirus outbreak means that land storage is being overwhelmed, said Robert Hvide Macleod, Chief Executive Officer of Frontline Management AS. The world is likely overproducing by about 20 million barrels a day, or 20% of normal consumption, he said, echoing wider industry views.

“Oil is going on ships at a speed never seen before,” he said, noting that the tanker fleet is filling up at five times the pace of the last oil glut in 2015.

The oil market’s structure has fallen into a so-called super contango, which means it is now profitable for traders to buy oil today, store it, and reap the profits by selling it at a higher price months or even years down the line. International Seaways Inc., another owner, said on Thursday that the total volume of oil in floating storage may top 100 million barrels during this glut.

IHS Markit, an industry consultant, said storage sites could be filled by the end of the second quarter at current rates of supply and demand, implying producers will soon have to scale back. Firms including Vitol Group and Gunvor Group, two of the world’s largest oil traders, say there’s intense demand to keep barrels at sea.
Canadian crude is so cheap it costs more to ship it than buy it At $6.45 a barrel the heavy crude which was once in demand by US oil refineries is exceptionally cheap.  The shipping charges are between $7 and $9 a barrel.  The cut back in demand is also challenging operators of stripper wells in small communities in the US.

US producers may get a break when the 15 quarantine is lifted in some areas.  President Trump has indicated that it is likely to be a phased operation and that farmers in the Midwest will probably be the first to practice "social distancing" outside their homes.  The counties that are outside the hot spot will probably start allowing movement of residents before those in high-density areas.

Since the Democrats took the purchase of oil for refilling the strategic petroleum reserve out of the massive stimulus bill. the US should consider renting out space to producers looking for storage options.


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