One conclusion to be drawn from the latest EIA stock data is that the impact of Hurricane Laura almost entirely disappeared. Domestic production increased by 300,000 bpd to 10 mbpd and net imports were also up by 581,000 bpd. Foreign crude arrival in the USGC rose by 400,000 bpd to 1.22 mbpd. No wonder, crude oil inventories built by 2 million bbls although it must be noted that PADD 5 contributed 1.14 million bbls to this increase.
Those who found the crude numbers disappointing took heart from the draws in product stocks. When refiners are cutting runs by a whopping 4.9% to 71.8% product inventories are bound to decline (and crude oil stocks build). It was probably the last present of Laura as utilization rate in PADD 3 dropped 10% to 63.9%, the lowest for three years and the second lowest on record. Consequently, both gasoline and distillate inventories fell around the Gulf of Mexico (2.3 million bbls and 1 million bbls) and nationwide (3 million bbls and 1.7 million bbls). Add to that the 800,000 bbls drop in the “other product” category and you end up with a drawdown of 3.4 million bbls in total commercial stocks.
Nationwide consumption looks positive, but scratching the surface reveals a dismal picture. Weekly demand rose by 1.7 mbpd to 18.7 mbpd. It was, however, the result of a rise of 1.5 mbpd in “other oil products”. Weekly gasoline demand was down by 400,000 bpd and distillate consumption dropped 200,000 bpd. When everyone is desperately looking for signs of green shoots on the demand front the latest figures are anything but encouraging.
Greatly aided by the weekly statistics oil prices dropped after a failed attempt to break higher in the morning. The late sell-off received additional support from Kuwait. The Saudi ally is the latest OPEC producer that lowered its official selling price to Asia for October.
It was not just oil that trended lower once again but equities too, making Wednesday’s impressive jump nothing more than a healthy correction in an otherwise falling market. The main US stock indices lost close to 2% of their value with tech stocks bearing the brunt of the beating. Initial US jobless claims stayed stubbornly high at 884,000 last week implying a very slow improvement in the job market. The US Senate opposed a Republican bill yesterday, which was aimed to provide $300 billion in fresh coronavirus aid. Investors’ patience has seemingly run out as they prepare themselves for much longer economic recovery than they originally hoped for.
Storage play revived
The price fall in the oil market that started last week has primarily been driven by demand considerations – both financial and physical. It has been long argued that the stock market strength that took major US stock indices to highs not seen before was not justified and the bubble must burst at one stage. Although the correction was expected to take place later in the year the revelation that one particular investor played a big part in this move up by building up a massive long positions of call options in tech companies brough the inevitable forward. Stock markets dived, oil followed, and Brent lost 15% of its value in five trading sessions as money managers liquidated. Net speculative length will have taken a significant hit in the latest reporting period.
As outright prices were coming lower time spreads followed suit. The front-month spreads of the two main crude oil futures contracts have generally weakened since last week. The October/November WTI differential fell from -32 cents/bbl to -43 cents/bbl between September 1 and September 8 although it strengthened on Wednesday. Brent, which is used more widely in pricing international grades saw its November contract losing 16 cents/bbl over December during the same period. The spread settled at -58 cents/bbl on Tuesday. The CFD curve also came under pressure. The contango on the front four weeks stood at 20 cents/bbl at the beginning of the month. This differential widened to 50 cents/bbl by Tuesday. It is worth noting that both the futures spreads and the CFD curve moved higher on Wednesday and Thursday and there is a reason for it.
The underlying weakness in the structure has made storing crude oil in ships economic again. Majors and trading houses have started to charter vessels to use them as floating storage. Storing oil in ships is generally more expensive than on land which reflects the oversupplied nature of the market – onshore stocks are nearly full. Back in April, the last time VLCCs were used for such purposes Brent contango was much wider. The front-month, on occasions, was more than $3/bbl cheaper than the second month. The M1/M6 Brent spread fell below -$11/bbl in the second half of April. Today it is much higher. Yet, a window of opportunity opened that makes storing oil in ships profitable. This opportunity was created by low freight rates.
According to Reuters, the going rate for a VLCC, which can carry 2 million bbls of oil, is about $20,000-$22,000 per day for the next 3-6 months. Chartering a VLCC cost well over $100,000 per day five months ago. When comparing the current low freight rates with the structure of the Brent market the math adds up. At $20,000 per day it costs 1 cent/day or 30 cents/month or 90-95 cents/three months to store a barrel of oil. The cost for six months would be slightly less than $2/bbl. Buying the contango three or six months out would lock in $1.45/bbl or $2.70/bbl, healthily above the cost of booking a VLCC. Probably this open window is the reason behind the very recent narrowing of contango in Brent futures and CFDs but the floating storage phenomenon sends out a rather bearish message – global oil stocks will not decline in the near future, quite the opposite.