It’s not typical for European crude inventories to fall in May, but this year has been different.
The Druzhba Pipeline, which can pump 1 million barrels per day, was closed after the discovery of contaminated crude mid-April. This removed a major source of supply from Russia to Europe.
On top of that, North Sea production was down due to fields undergoing maintenance.
These supply issues have apparently taken a toll.
OECD Europe crude stocks declined in April and May, according to our measurements. We measure crude inventories around the world every week using synthetic aperture radar (SAR).
The amount of crude in storage usually increases from January through May because of planned refinery maintenance.
Counterseasonal stock movements have also been happening in the United States, but in the opposite direction.
US commercial crude inventories fell on average by 9.5 million barrels from 2014-18 during the five weeks ending May 31, while this year has witnessed an increase of 12.7 million barrels.
The same story has unfolded in Cushing, Oklahoma -- delivery point for the NYMEX WTI contract.
Which locations in Europe have seen the biggest declines?
Looking at the period between the weeks of April 11 and May 30, the top five draws in descending order are Rotterdam (Netherlands), Immingham (UK), Le Havre (France), Fos-Sur-Mer (France) and Wilmshaven (Germany).
Here’s a chart of the top three sites, by percent of capacity:
How significant is this trend?
On one hand, the causes behind the supply disruptions are getting resolved.
North Sea field maintenance has ended, allowing production to rebound.
As for Druzhba, the clean-up will last for months. While the pipeline’s northern route remains closed, the good news is the pipeline’s southern route has reopened.
The Druzhba Pipeline splits into two branches in Mozyr, Bulgaria. The northern part supplies Germany and Poland, while the southern link serves Ukraine, Slovakia, Czech Republic, Hungry and Croatia.
Illustration Credit: Andrew Morse/Ursa
Russia’s oil pipeline monopoly, Transneft, has promised that it will deliver “clean” oil to the Polish border through the Druzhba Pipeline by June 8.
Russia’s seaborne exports were also disrupted because crude with dangerously-high chloride levels was also discovered at the Baltic Port of Ust-Luga.
Ust-Luga is major departure point for Russian Urals, normally loading some 500,000 bpd onto tankers destined for demand centers, like Rotterdam, Wilmshaven and Gdansk (Poland).
Russia's energy ministry said May 10 that clean oil was being loaded onto tankers at Ust-Luga; not before causing mayhem among oil traders.
Port of Rotterdam
The owners of contaminated crude loaded in Ust-Luga were left trying to find buyers for cargoes that would ordinarily fetch $500 million.
The nearby port of Primorsk is also a major loading zone for Russian Urals. Unlike Ust-Luga, Primorsk isn’t fed by Druzhba. So Primorsk was able to pick up the pace of loadings to help offset the lost supply.
One destination for Primorsk loadings was Gdansk, which stopped receiving any crude via the Druzhba Pipeline and (as mentioned above) felt the impact from Ust-Luga.
In May, Gdansk’s seaborne imports reached a record-high of 2.1 million tons, of which 1.5 million tons came from Primorsk.
The extra pull for Primorsk loadings of Russian Urals resulted in inventory draws at the Baltic Sea port, which you can see in the chart below:
Despite efforts to make up for the shortfall, the Druzhba problems have meant less crude supply for refiners, forcing owners to cut runs, shut down or move ahead planned maintenance.
That’s been true in eastern Europe and Germany (e.g. Total’s 230,000 bpd Leuna refinery) and as far away as Rotterdam.
That list includes BP’s 400,000 bpd refinery in Rotterdam, where maintenance began mid-May rather than October.
Here’s where the chain reaction that began with the Druzhba Pipeline and North Sea becomes less certain.
The slowdown in European refinery activity has begun to squeeze fuel supplies, pushing margins higher.
Gasoline margins rose above $13/barrel, while diesel margins were roughly $15/barrel, according to Reuters.
Any refinery that can secure supply would certainly seize this opportunity to run hard and capture a nice profit.
Which side will win out? Will refinery utilization take a step back or march higher?
The answer will help determine inventory levels this month at a time when OECD stocks are being scrutinized.
Saudi Arabia’s energy minister Khalid Al-Falih has repeatedly said that OPEC’s voluntary production cut agreement is necessary to shed high inventory levels.
That argument has been supported by US crude stocks, which just reached 483.2 million barrels, the most since July 2017.
In this blog, we also highlighted recent builds in Chinese crude inventories, which could continue if independent refiners cut runs in response to poor margins.
OECD Europe crude inventories are part of this backdrop, and the direction they take could influence OPEC production policy.