Oil Storage Fills Globally
More than twice the usual number of oil tankers languish off the coast of Europe’s largest oil terminal in Rotterdam, as the port struggles to unload into bloated oil storage facilities. It is reported that twice the standard number of vessels are outside the port, leaving around 50 patiently waiting.
This side of the pond it’s a similar story, the leading US oil storage facility in Cushing, Oklahoma is also at record highs, with an estimated 30 million barrels waiting to discharge. The oceans of the world have become awash with tankers full to the gunnels, as traders now begin eyeing up oil storage opportunities in their voluminous hulls to maximize returns from a market in contango.
So what next?
With lower-cost producers like Saudi Arabia refusing to blink, US oilmen will continue to get frozen out of the market due to their higher production costs, with WTI spot prices at $31bbl and US production costs near $50bbl. Some might say this is a deliberate ploy by the middle east to take US production off-line and damage growing upstream independence. Whatever the reason, we do know that it will take some time to re-balance the global market.
World oil storage is now at its highest levels. Almost 3 billion barrels are now tucked away, requiring a significant uptick in global demand or a drastic reduction in production levels to impact prices in the short term. The expectation is that the cuts to US production will be more profound than expected, lifting prices, but to what degree is the overarching question.
It is the impact on natural gas shale production, which is on most consumers’ minds. The markets show a gradual increase at the moment for 2016, with December, usually an expensive winter month, trading at the $2.50 d/th level. Natural gas storage is at the high of the five-year average, but just how this will be impacted with so many rigs dropping off the upstream landscape, is again, yet to be seen.
What we do know is that enterprises who expect to be consuming energy for the next three to five years need a plan to secure the price levels they see today. With flexible supply agreements, underpinned by sound risk management, which allows companies to secure volume in smaller parcels, this is something more and more companies are building into their strategic plans.