Warning lights for global oil glut go off
Bloomberg reported that 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 Plc Chief Executive Officer 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 a barrel, leading the International Energy Agency to conclude that the worst of the rout is over. Contrary to expectations that tankers would be needed, onshore storage hasn’t been exhausted
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, according to data from the Baltic Exchange in London. That’s about 30 percent more than a month earlier. In dollars-per-barrel terms, the cost of using the ships to store for six months advanced to $6.80 from $6.16 over the month, E.A. Gibson estimates.
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 $2.59 a barrel on Monday, down from $5.07 a barrel on Jan. 29.
It’s a distinct shift from the market conditions prevalent a month ago, when Chris Bake, a senior executive at Vitol Group, said that with primary storage sites “pretty much full,” it was “probably a good time to be a vessel owner.”
The biggest change between now and a month ago is oil supply that’s been unexpectedly curbed. One pipeline linking the the northern part of Iraq to the Mediterranean Sea halted in mid-February, while another from Nigeria was hit by sabotage. U.S. oil production is threatening to drop below 9 million barrels a day for the first time since November 2014.
Source : Bloomberg