During an oil supply glut, the cupboards are overflowing

JUST like the lady who has more shoes than her cupboard will hold, the vast elaborate global system to store unwanted crude oil has come close to bursting at the seams.

For the past few weeks, concerns that the world was about to breach the “storage wall” has roiled global oil markets, putting pressure on an already bearish oil price. In the United States futures market, oil prices for benchmark West Texas Intermediate (WTI) fell below $0 per barrel for the first time in history when those holding expiring futures positions paid buyers to take the contracts off their hands.

According to the International Energy Agency, the Paris-based global energy watchdog, global crude oil inventories are expected to continue to rise to near operational capacity by the end of June as the global corona virus pandemic takes its toll on economic activity and demand for oil. Combine the demand slump with a price war between OPEC and other key oil producers and we are faced with the glummest oil market fundamentals in decades.

Fortunately for us here in Guyana, OPEC, Russia and other key producers buried the hatchet last month and agreed to slash production. The low price also led U.S. suppliers to shut in wells in Texas and elsewhere and set down drilling rigs. And with some countries easing stay-at-home restrictions on signs that the spread of the virus may be slowing, demand for gasoline and other fuels is slowly creeping up. The price of benchmark Brent Blend, which serves as a price marker for our Liza crude oil has risen more than 55% over the past month.

In fact, analysts, Clearview Energy Partners, last week noted that latest monthly data from the IEA, OPEC and the U.S. federal Energy Information Administration (EIA), project oil demand may even exceed supply by a “material amount” in second half 2020.
But anyone who follows volatile commodity markets knows, perception has a lot of influence on daily price swings. Until the market is able to significantly off the oversupply, traders and other market watchers will be tracking tanker movements and crunching storage data for signs that the tide is turning.

And there are many more places to monitor than before when looking for the barrels. From government-held stockpiles in underground salt caverns to oil terminal facilities and even tankers loaded with crude — floating storage — off the coast of California, traders are stashing oil wherever they can, awaiting buyers. Canadian pipeline company, Enbridge, announced, recently, that it would make room for some crude oil storage on its natural gas pipeline system that stretches across the country and into U.S. markets.
In fact, some savvy entrepreneurs rushed to cash in on the storage crunch. The Wall Street Journal recently told of a water company selling space in giant above-ground containers that look like swimming pools.

So should Guyana invest in its own deep water cavern or massive onshore storage tanks to stash away production to wait for better prices? The answer, according to some experts, is not yet. First, Guyana’s production is very small in the global oil market with a cargo setting sail only once every 7-10 days and that oil is pre-sold. Plus the costs and complicated logistics of expanding storage facilities in Guyana outweigh the reward at this time.

Energy Department Director, Dr. Mark Bynoe, said it was too early for Guyana to consider onshore storage options. He noted that Guyana had already sold its first three cargoes of Liza crude so it is covered for the next few months and he questioned whether it would be wise for Guyana to incur the costs of hiring space on tankers that would be parked offshore waiting for buyers.

“As we have seen, there are a number of companies that are hiring the VLCCs (Very Large Crude Carriers) to store their fuel given the shortage of space. Those costs are escalating on a daily basis. So, we have to take the totality of costs and benefits into consideration before we arrive at a single position,” Dr. Bynoe said.

Dean Foreman, Chief Economist at the American Petroleum Institute, told reporters recently that Guyana should take a fit-for-purpose approach. “Every oil producer requires some floating storage, cavern storage or tankage, and the challenge differs by country. Guyana should collaborate with industry to consider storage alternatives that are appropriate and right-sized for its production.”

Foreman noted that in the United States, storage has become scarce locally near the trading hub in Cushing, Oklahoma, for West Texas Intermediate crude oil. However, storage capacity still remains available across the broader system, provided firms have pipeline capacity to reach it.  The U.S. also has a variety of storage options, from tankage, to underground caverns, to ships/floating storage.

Overall, it would seem we remain in a good position relative to others. And, we have some time to decide what storage for us will look like in the future.

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