Oil & Gas
Feature Articles
Global Crude Trade Rebound and Stocks
April 2021
Crude oil markets may have successfully rebounded from the shockwave of COVID-19, but a positive medium-term outlook for crude and products trade is far from secure.

The supply picture is being blurred by heightened uncertainty which has created an investment dilemma for producers. This is being considered against global demand that may never return to pre-COVID-19 levels, according to the International Energy Agency (IEA).

However, the change in behaviour invoked by COVID-19, including remote working and severely reduced travel, could combine with a more vigorous focus on a low carbon future to reduce global oil demand. In 2020, the start of the IEA’s forecast period, oil demand was nearly 9Mbpd below the level seen in 2019, and it is not expected to return to that level before 2023.

This means that peak oil could happen sooner than anticipated, a prospect that is making oil producers jittery in committing to long term investments.

On the supply side, the heightened uncertainty over the outlook has created a dilemma for producers, according to the IEA report. Investment decisions made today could either bring on too much capacity that is left unused or too little oil to meet demand.

Only a marginal rise in global upstream investment is expected this year after operators spent one-third less in 2020 than planned at the start of the year.

Those sharp spending cuts and project delays are already constraining supply growth across the globe, with world oil production capacity now set to increase by 5Mbpd by 2026.

In the absence of stronger policy action, global oil production would need to rise 10.2Mbpd by 2026 to meet the expected rebound in demand. That said, the COVID-19 related collapse in demand means that there is a spare production capacity cushion of a record 9Mbpd that could keep global markets comfortable in the near-term. 

However, in the absence of fresh investment that supply ‘cushion’ will slowly erode, according to the IEA. Rationalisation in the refining sector will put further pressure on this capacity cushion and while global shutdowns of 3.6Mbpd have already been announced, a total of at least 6Mbpd will be required to allow utilisation rates to return to above 80%.

 

Huge Inventory Surplus

In 2020, COVID-19 dramatically reduced the demand for crude oil, which was coupled with an oversupply due to Saudi Arabia increasing oil production and OPEC and non-OPEC countries failing to come to an agreement on reducing oil production. This meant storage tanks were near capacity. In response, oil storage companies drastically increased their storage lease costs by up to 100%.

Drawdowns of the huge inventory surplus – which amounted to more than 1.0 Billion barrels (Bbbl) of crude oil, feedstocks and oil products accumulated in various storage sites around the world in 2020 – started in June 2020.

 

China's Stock Build

China accounted for around 60% of global crude oil stock builds in 2020, according to the IEA, increasing its stock holdings to an estimated high of 955 Million barrels (Mbbls) in September 2020.  Some of the inventory stores are now filtering back into the market as demand recovers and OPEC+ production cuts bite, however not all will return.

Crude oil inventories in China declined from the September high to a low of approximately 910Mbbls in January 2021.  The March stock level is believed to be around 930Mbbls, down 25Mbbls from a September 2020 peak. COVID-19 accelerated the decline of Chinese stocks as did new storage capacity, new refining capacity, and a renewed focus on import independence and energy security.

 

 

China’s inventories build in 2020 was initially led by demand after the Chinese lockdowns ended, and then stocks increased because of soaring crude oil imports.  China effectively served as a sink for the world’s excess production at a time when other consumers cut back on imports and started drawing down inflated inventories. The expansion of China’s storage capacity and the efforts to have more stocks to ensure energy security has likely reset China’s baseline for inventories at a higher level.

Given its large stock builds and its important role in the global oil market, China’s inventory strategy going forward will have important implications for the global oil market as any additional builds in its strategic reserves will essentially amount to incremental demand.

Taking into account China’s steady crude storage capacity expansion over the past few years, it seems unlikely that Chinese stocks will be drawn down as quickly as in other countries in 2021.  Chinese companies have sharply increased their commercial storage capacity at refineries and terminals in line with new builds and expansion projects. As a result, it is unclear how much of its commercial oil inventory building will make its way back into the market this year.

 

US Stock Build

In response to the global demand and supply shocks from COVID-19 and OPEC+ meetings, the demand destruction and subsequent supply glut led to rising inventory levels from April to June 2020.  Consequently, the arbitrage price signals responded to the volatile market fundamentals to re-direct barrels to flow into storage, due to the declining export arbitrage in the US Gulf Coast market. 

The contango price structure in the NYMEX Light Sweet Crude Oil Futures Contract pulled barrels to the Cushing hub due to the storage incentives.  In fact, the expanded pipeline infrastructure in the US Gulf Coast and Permian Basin provided an important option to the marketplace, providing an outlet for barrels to flow to Cushing and to other Gulf Coast storage hubs to benefit from the storage economics.  As global oil demand has started to re-appear after the pandemic, storage levels declined as the arbitrage price signals began to pull barrels out of storage and direct them to the refining sector and the export market.

The unprecedented global market volitility applied intense stress on the oil industry in the first half of 2020, as companies responded to the volatile arbitrage price signals and hedged the associated price risk.  

 

US Storage Overview

Crude oil storage levels in the US rose sharply in April 2020 and peaked at 541Mbbls in June 2020, this represented 80% of the total working storage capacity in the US of 672Mbbls, according to the US EIA.  By the end of January 2021 US crude oil inventories had declined to 475Mbbls or 71% of the total US working storage capacity.  The chart below shows the rapid rise in US crude oil stocks to the June 2020 peak, the plummet in stocks through 2020 and the recent surge to 502Mbbls reflecting return to milder temperatures and signaling the start of the storage injection season.

 

 

Looking Ahead

In early 2020, responding to extreme demand destruction and supply shocks, companies around the globe responded to arbitrage price signals as they strived to manage the price risk associated with the rising level of crude oil inventories.  The volatile price arbitrage pulled barrels into storage at a record pace during April to June 2020 and the export arbitrage declined in the US Gulf Coast market. 

With the slow return of global refining demand, storage levels peaked in early 2020 and thereafter declined rapidly as the arbitrage price signals began to pull barrels out of storage and re-direct them to the refining sector and the export market.  As the market begins to re-balance in 2021 and 2022, companies will face the challenge of hedging the price risk that lies ahead in the “new-normal” that will emerge in the global oil market.