US refineries typically draw more oil during the summer to provide fuel for the vacation season. But Americans are not taking advantage of today’s lower prices, and crude oil stockpiles and gas inventories in the US did not sell as much as expected.
Global events, including the destruction of oil infrastructure in Nigeria and wildfires in Canada, have masked the oil glut and have led to a false increase in price. Just last week, we saw prices drop by a sharp 5%. Falling prices and faltering demand have led to an excess of crude, which is now being stored in massive offshore fleets in the New York Harbor, the North Sea, and off the coast of Singapore.
Oil traders are doing so out of necessity, not for profit. Ian Taylor of Vitol Group (the world’s biggest independent oil trader) stated last week that the contango “isn’t wide enough to make stockpiling at sea profitable. Any use of ships for storage now is probably out of necessity amid unloading delays at some ports.”
The North Sea fleet is hoarding an estimated 9 million barrels of crude, the largest stockpile we’ve seen since 2009. “The volume of oil in storage on ships worldwide reached 95 million barrels at the end of June,” reports the IEA. That number has fallen as the Singapore fleet unloads in anticipation of a market shift from contango to backwardation.
“Storing oil on ships can be profitable when prices for future delivery of crude are higher than in spot market” – a state known as contango – “as long as future prices are high enough to offset tanker charter costs. However, with the 1-year contango for Brent futures collapsing from $7.60 per barrel in January to just $4, far below the $10 that traders say is currently required to make floating storage financially attractive, suddenly parking oil offshore leads to storage losses. The same goes for WTI,” reports Zero Hedge.
Those who refuse to seek land storage are incurring debt at an alarming rate, turning to banks to finance expensive storage charters.
This buildup of offshore stockpiles shows that even as excess oil production fades and global markets start to re-balance, the process won’t be easy. As I mentioned before, the expected increase in demand does not exist. The Energy Information Administration reiterates that America’s demand for oil is waning during a time in which is should be surging.
China’s high demand for fuel was once viewed as a sort of “buffer” for the global surplus of crude – but no more. China’s “teapot refineries” are flooding the market with diesel and gasoline, and these exports are disrupting the commodities industry. Zero Hedge predicted last month that China would soon unleash a wave of accelerated gas exports across the world. They were right.
China’s gasoline stocks will soar to record levels as the communist nation continues to import massive amounts of crude and product. “In other words, the global glut is now not only at the crude and distillate level, but also in global gasoline stocks.”
China is “unleashing a deflationary wave around the globe,” reports Zero Hedge. This behavior “mirrors similar increases in China’s exports of processed basic materials like steel in recent months, a trend that has provoked anguished complaints form governments and industry bodies across the world.”
China’s refineries are already selling at the lowest prices, and will certainly find buyers (even in a flooded market). “This is just the beginning,” predicts energy analyst Nelson Wang, noting that China’s teapot refineries are planning to export more in upcoming years.
All of this may be great news for the average driver, but the global oversupply combined with China’s surging exports threatens to make life even more difficult for struggling oil-dependent nations in the Middle East if oil prices don’t recover.
Editor’s note: Squabbling and disunity in OPEC nations have allowed pricing to drop, they are all suffering. But all things oil are cyclical. OPEC and other oil producers will eventually realize their excess production is killing them, and they will once again try to squeeze more profit out of the world by cutting production and getting prices to rise. This will overshoot since it always takes time to restore production.
So while we may see some good pricing in the short run, don’t count on low gasoline prices for very long.