World’s Largest Oil Supply Surplus About to Hit the Global Market: Rystad Energy

The largest oil supply surplus the world has ever seen in a single quarter is about to hit the global market from April, creating an imbalance of around 10 million b/d, Rystad Energy, an Oslo, Norway-headquartered independent energy research and business intelligence specialist said March 24.

A Rystad analysis shows global storage infrastructure will be unable to take more crude and products in just a few months. Current liquid balances show supply surpassing oil demand by an average of nearly 6 million b/d in 2020, resulting in an accumulated implied storage build of 2 billion barrels this year, Rystad said.

In mid-March Reuters reported that “major oil companies including BP and Shell are preparing to take the rare step of storing jet fuel at sea as the coronavirus outbreak disrupts airline activity globally, while refiners are shifting to diesel because of the poor margins associated with jet fuel production.” But Rystad noted that “there is essentially no idle storage capacity available on tankers, as Saudi Arabia and other producers might have already wiped out the available population of Very Large Crude Carriers (VLCC) for March and April 2020.”

“Based on our rigorous analysis, we find that the world currently has around 7.2 billion barrels crude and products in storage, including 1.3 billion to 1.4 billion barrels currently onboard oil tankers at sea,” Rystad said. “We estimate that, on average, 76% of the world’s oil storage capacity is already full.”

Rystad data shows that the theoretical available storage capacity at present is just 1.7 billion barrels onshore for crude and products combined. Using the company’s estimate of an average of 6million b/d of implied oil stock builds for 2020, in theory, it would take nine months to fill all onshore tanks. However, in practice, a ceiling could be hit in a few months because of operational constraints.

“The current average filling rates indicated by our balances are unsustainable. At the current storage filling rate, prices are destined to follow the same fate as they did in 1998, when Brent fell to an all-time low of less than $10 per barrel,” says Paola Rodriguez-Masiu, Rystad Energy’s Senior Oil Markets analyst.

The drive to fill inventories come as the market has shifted from backwardation to contango, driven by much lower worldwide petroleum demand, EIA added. In its March 2020 Short Term Energy Outlook, released March 11, EIA forecast that commercial petroleum inventories in the industrial nations of the OECD would rise to 2.9 billion barrels in March, an increase of 20 million barrels over the previous month and 68 million barrels over March 2019). EIA, added, however, that since the release of the March STEO, “changes in various oil market and macroeconomic indicators suggest that inventory builds are likely to be even greater” than its previous estimate.