Floating storage off Singapore is a less visible number is flashing a warning sign for the global oil industry, say analysts, even as oil prices have been pushed to their lowest levels of 2017 as U.S. crude inventories surged by 8.2 million barrels last week despite OPEC efforts to curb a glut of supply.
“It’s not unsurprising to see a build at this time of year, it is seasonal, but to see a build of this size really did surprise the market,” said Matt Smith, head of commodity research at ClipperData, which tracks vessel and cargo movements in the crude oil market.
The fact that the market has not yet absorbed the surge in shipments in the last two months of 2016 is indicated by the firm which is sounding a warning on the unprecedented floating storage inventories in Singapore.
“Floating storage off Singapore reached an all-time high in February,” Smith said.
“We started to see Singapore floating storage dropping off last month from that record high of 60-million barrels, but we saw it rebound last week.”
With OPEC sending over three- fifths of its production to markets in the Asian region, producers ramped up production and exports to maximize revenues ahead of the OPEC production cut.
16.1 million barrels per day was hit by February arrivals. According to ClipperData, that is nearly 300,000 barrels higher than the previous record set in February 2016 and 1.1 million barrels more than last year’s average.
And noting the highest level on available records, the influx lifted Singapore floating storage to 64-million barrels in early February since the region’s refineries cannot process that much crude.
“As long as we see 60-million barrels floating offshore in Singapore, it is just indicating that the market is still oversupplied and is not absorbing all this oil,” Smith said.
The owners of the crude sitting in vessels off the coast of Singapore face a conundrum as the structure of the futures market is making it less compelling to store oil.
Transitioning from a contago structure to a backwardated one, the structural rebalancing of the global crude market was being reflected in the futures curve, noted analysts at BMI in a February research report.
“Oil traders will find it harder to make money in a backwardated market compared to one in contango, as the opportunity for ‘cash and carry’ trades disappears,” analysts said.
Locking in profits using futures contracts, in this scenario, traders buy and store crude oil to sell at a later date when prices are higher.
However, the reversal in the market dynamic should help to draw down bloated inventories and contribute to the global rebalancing as in a backwardated market, there is no incentive to store crude.
“Now that the contango has narrowed, there is much less incentive to store oil at sea. That makes Singapore floating storage all the more interesting,” said Smith.
The recent pullback suggests the market is tightly wound and vulnerable to any headline shocks even though oil prices have rallied since December on expectations that an OPEC supply cut would balance the market.
“Before this surplus is worked off, it is too early to declare victory and watch the prices rise. The oil market is global, and getting U.S. inventory under control is not enough, said Smith.
(Adapted from CNBC)