The Great Recession Blog
by David Haggith
Here are several quick looks at the oil supply glut and whether it is likely to worsen, hold the same, or improve during the summer of 2016.
First, a picture of the cost of the oil supply glut
This snapshot of a major oil company epitomizes what is happening in most oil companies, big and small:
Shell’s job losses are about to match Facebook’s total payroll. Royal Dutch Shell just announced it will eliminate another 2,200 jobs, mostly due to the oil glut price crisis. This will bring Shell’s total job losses by the end of 2016 to 12,500 people who have been terminated.
“These are tough times for our industry,” Paul Goodfellow, Shell’s VP in the UK and Ireland, said in a statement. “We have to take further difficult decisions to ensure Shell remains competitive through the current prolonged downturn.” (Oilprice.com)
Shell has also said it will dispose of $30 billion in assets to raise cash in order to make it through the crisis. (To the extent Shell is feeling the bite, so are all the rest.)
Persian Gulf bank oil oversupply engulfs banks in region
Now a quick pic of how the oil supply glut is hitting banks in far parts of the world: More than 65% of banks in the Persian Gulf reported an increase in defaults in the first quarter of the year.
“The days of double-digit profits and expansion plans are gone,” said one United Arab Emirates-based banker. “Now, it’s all about single-digit growth and controlling costs as bad loans are going to keep getting higher. It’s the new normal.” (NewsMax)
Banks, in other words, are rolling back their profit hopes and settling into the idea that oil prices in the current low range are the new norm.
The oversupply of oil means ports are swamped with oil tankers
This picture of one port tells a major story: Tankers are running circles around the Chinese port of Qingdao. One ship has been carving circles in the water for twenty days, waiting for a chance to offload at any one of several “teapot” (small) refineries in the region.
China is the world’s second largest consumer of oil. Lack of available storage capacity on land is slowing down the rate at which refiners can take in crude, as is a reduction in the profitability of refineries, which is causing them to back off on refining.
“Weakening margins are likely to have a stronger impact on independent refineries in China and this will lead to lower crude imports,” said Hong Sung Ki, a senior analyst at Samsung Futures Inc. in Seoul. “That will result in a downward revision for China demand and this will inevitably have a negative impact on oil prices.” (Bloomberg)
Again, a picture that looks likely to worsen over the summer.
Another reason China is awash in oil along its shores is that many OPEC nations took out loans from China that were repayable in oil, not dollars. These nations are now repaying their loans in oil to get more loans in money because they have a lot more oil than money. That’s causing more oil to flow to China than it can use. Yet another reason for oil oversupply in China is that Saudi Arabia, Russia and Iran are all caught up in a oil price war over market share in Asia. That, too, is not going away.
Oil supply looks constipated off the coast of Singapore, too.
“I’ve been coming to Singapore once a year for the last 15 years, and flying in I have never seen the waters so full of idle tankers,” said a senior European oil trader a day after arriving in the city-state…. “The volumes of oil stored at sea in South East Asia – predominantly Singapore and Malaysia – appear to have increased significantly,” said Erik Broekhuizen, Global Manager of tanker research and consultancy at New York-based shipping brokerage Poten & Partners…. “Prices are unlikely to rise too much as the specter of glut is still there….” (Reuters)
Tanker traffic, alone, in Singapore looks like this right now:
… like rush hour on the freeway or like swimmers in the ocean at Waikiki. Add in all the other kinds of vessels, and it looks like you could walk across the straits, leaping from vessel to vessel between any two points of land. The number of tankers that are serving as offshore oil storage in the area is increasing at a rate of 10% per week.
Who is creating this tanker backup and does it have anything to do with jacking up oil prices?
Glencore, has built up a massive inventory stake in the Brent market … which it is holding for offshore storage in its tankers in hopes of pushing the price.… As Reuters details … Glencore has built up one of the largest positions in part of the Brent crude market which acts as a benchmark for global oil prices since the start of the year…. According to Reuters Glencore is quietly cornering the Brent market, by holding more than a third of the 37 BFOE cargoes loading in June and is expected to acquire more. (Zero Hedge)
So, yes, this is, at least in part, according to Reuters, a “rigged” market, pardon the oil industry pun. Oil prices are being manipulated upward by some serious attempts to corner the market.
Is the backup of oil tankers a sign of oil oversupply in other parts of the world?
Yes, the backup of oil tankers is getting bad in other ports of the world. Here’s a snapshot from Norway. One new Great Recession Blog reader today writes,
Outside my window I can see 6 supply/stand-by ships from the oil industry without assigment! And they are everywere along the Norwegian coast! So Norway is in no way doing as great they like to show off to the world. Its going downhill…..
But is this backup of oil tankers financially insane?
Storing oil in tankers doesn’t come free. You pay by the day, so profits of the shipment go down the longer the oil sits on the sea.
The need to store oil is so strong that traders are calling up banks to finance storage charters despite there being no profit in keeping fuel in tankers at current rates. “We are receiving unusually high amounts of queries to finance storage charters,” said a senior oil trade financier with a major bank in Asia. “These queries come from traders fully aware that they will not make a profit from storing the oil. This isn’t a trade play, it’s the oil market looking for places to store unsold fuel,” he added…. A trade financier at a European bank said there had been a “spike in interest from oil traders to finance their storage needs” since the start of the year as onshore facilities were almost full…. “There is clearly still far too much physical crude going around for the glut to be over,” said the European oil trader after flying in to Singapore. “And the paper market seems blissfully unaware of it.” (Reuters)
Ah well (sighs). I’ve been trying to make them aware of it! But people don’t see what they don’t want to see, even when an oil slick is floating right past them.
What is oversupply likely to do to oil prices this summer?
A quick view from one major oil trading company. SCS Commodities Corp says that the “latest rally has come to an end” and reports:
Record inventory gluts at storage hubs from Cushing to Rotterdam exacerbated by supply gains from core OPEC members … [even as ] Canada’s wildfires disrupted output by more than expected this week…. The median estimate for lost Canadian barrels … is still about 1m bpd…. Cushing stocks and overall U.S. inventories both built to new record-highs with help from a flood of imports into the U.S. Gulf Coast. Overseas, Libya’s Hariga port loaded a 650k bbl tanker for the first time since April following the completion of a deal between Tripoli and eastern Libyans. (Oilprice.com)
Canada’s temporary oil supply interruption could go away as quickly as Libya’s did, causing the supply glut in the US to build at a quicker pace. US refiners also still have 10,000,000 barrels of crude in floating storage in the Houston area. And US oil rig count finally ended eight consecutive weeks of free fall, holding flat last week. Nigeria’s production, which helped pick up oil prices when it fell due to attacks on Nigeria’s pipelines, is already returning toward normal.
Saudi output is expected to increase this summer because Iran has fully entered an Asian price war with Saudi Arabia in Asia, and the Saudis will fight back for market share:
Iran has regained almost half of its pre-sanctions European market, and exported 1.7 million bpd to Asia in April. Last week, Iran introduced a discount on the June contract for its heavy crude going to Asia, just a few days after Saudi Arabia announced a price increase for its own June contract for the continent. With the discount, Iranian oil will be noticeably cheaper for Asian clients than both Saudi and Iraqi crude. (Oilprice.com)
Nevertheless, the inventory build in the US dropped more than expected in the latest report today, bringing oil prices to a seven-month high. In spite of the storage drop, however, oil failed again to push through $50, which has been looking more and more like a firm ceiling.
Of course, if the Fed does what it cannot do but says that it will and raises interest rates, that will raise the value of the dollar, making petrodollar-priced oil more expensive for most of the world, which would likely suppress global demand a little, countering the normal summer rise in gasoline demand around much of the world.
So, all is fragile and continues to hang in the balance daily, but the factors that have reduced the glut appear to be abating, while some of those that could increase it are growing.