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Asian appetite for petroleum storage, reserves will not save global oil prices: Fuel for Thought

China’s insatiable appetite for hoarding oil reserves and the expansive independent petroleum storage capacity from Singapore to South Korea will not be enough to absorb the incoming flood of crude and refined products that threatens to push oil prices even lower.

For decades, Asia’s petroleum storage has expanded via underground salt caverns, independent tank farms, operational storage for mega refineries and even oil stored in pipelines by key companies and trading houses.

The expansion has played a big role in absorbing global oil shocks, including the 2015-2016 oil downturn when global inventories hit a peak of 5.3 billion barrels, according to industry estimates, forcing OPEC to make production cuts to ease the glut.

But the current market is seeing a rare simultaneous shock from both global supply, due to the oil price war between Saudi Arabia and Russia, and demand, due to the coronavirus pandemic, creating an unprecedented oil surplus that stretches storage capability to its limits.

From the archive: A rare tour of the Strategic Petroleum Reserve

The initial surplus will be seen in refined products as refineries maximize margins on low crude prices.

But there is not much room left after oil companies and traders hoarded compliant fuels in anticipation of the International Maritime Organization’s global low sulfur marine fuel requirements, that took effect January 1. As 2020 rolled in, global shipping was hit by the coronavirus outbreak and demand never materialized, leaving tanks full.

“We saw a big movement of storage towards the end of last year getting ready for January 1st. That storage is still in play,” said Tony Quinn, chief executive at Tankbank International Ltd., in an interview.

“There was a lot of blending going on that’s still happening in my terminals in Fujairah and keeping them very busy,” he said. “I have both of them 100% contracted and occupied at the moment and the same can be said for terminals I’m aware of here in Singapore.”

IMO changes

Quinn, who is also an operating partner at energy infrastructure investment firm Prostar Capital and a main board adviser to Fujairah Oil Terminal, said initially there was uncertainty around IMO 2020, but by the end of last year independent terminals filled up on both high- and low-sulfur fuel oil.

But because of COVID-19 and other demand issues, there was still an awful lot of product that has not moved and stockpiles are at an even higher level than expected.

“So, that will probably roll into the third quarter this year before that drops down in to any sort of demand or storage position,” Quinn said.

“I’ve got one of the only two crude oil terminals in Fujairah, but our crude tanks are fully contracted for the next four years. So, there is no advantage there. There’s no contango position that can be used in Fujairah for crude.”

Oil reserves, negative prices

With limited product storage, the onus is on countries like China and India that have been building strategic reserves to absorb the huge global surplus.

Citigroup estimated for 2020 as a whole, the oil surplus could be as much as 1.27 billion barrels in the base case and around 2.73 billion barrels in the bear case.

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It also estimated global crude storage capacity may be just over 6.1 billion barrels, including strategic petroleum reserves, of which around 1.645 billion barrels is the effective spare capacity available.

Out of this, 419 million barrels is in the US and 262 million barrels is in China, Citigroup said, adding that Saudi Arabia and the UAE could actually push oil out of storage tanks into world markets in the second quarter, displacing crude in storage tanks elsewhere, and leaving effective spare global crude oil storage capacity at 1.545 billion barrels.

“Putting these seemingly astronomical numbers into context, the world has seen billion-barrel stock builds before, albeit over seven quarters, not one,” wrote Ed Morse, Citigroup’s head of commodities, in a note last Wednesday.

He said the markets will be headed into a very desperate situation if the world, or even some regions, runs out of storage.

If production shut-ins do not happen quickly enough, he said “we could see negative physical [oil] prices in places, as seen in, say Waha natural gas at times in recent years [in the US’ Permian Basin] due to the lack of takeaway and storage.”