In early July, Saudi Arabia’s energy minister Khalid al-Falih said that output cuts by OPEC and other major producers needed to be kept in place to lower crude inventories.
That wasn’t the first time al-Falih has mentioned crude inventories as the preferred metric for determining OPEC production policy.
What surprised many people was the time period he selected.
Al-Falih argued against using the last five years (2014-18), which includes huge inventory builds resulting from the US shale boom.
Instead, the OPEC+ coalition should cap output until crude inventories fall back to the average level from 2010-14, he said.
This is a harder task to accomplish.
OECD inventories stood 220 million barrels above the five-year average from 2010-14, but only 6.7 million barrels above the five-year average from 2014-18, according to the latest International Energy Agency monthly oil report covering May.
The more fundamental point is whether OECD inventories alone provide an accurate snapshot when you consider all the countries outside this organization.
It’s a point we’ve raised before, considering the availability of global inventory data now available by leveraging satellite imagery.
At Ursa, we measure global crude inventories on a tank-by-tank basis every week using synthetic aperture radar (SAR).
To drive home this point, let’s take a look at a map broken out by key regions showing inventory changes so far this year.
Illustration Credit: Areya Muraca/Ursa
There are a few takeaways from this map worth highlighting.
Chinese crude inventories have increased substantially, though not by as much as the surge in imports.
Stocks have been rising in Northwest Europe & the Mediterranean
The US Gulf Coast and Caribbean have seen inventories decline, though for different reasons
For obvious reasons, China would rank at the top of the list of countries outside OECD membership of importance to the global oil market.
Yet it’s a place overlooked by OPEC+ insofar as crude inventories are concerned, a point we’ve cautioned against in this blog.
Source: Maxar Technologies, Google
While the YTD builds in China would appear bearish, the fact that imports have increased by even more implies high refinery runs.
A new mega-refinery recently came online, while another one is under construction.
A partial list of Chinese sites where stocks have risen in 2019 includes Tianjin, Lanzhou, Zhoushan, Quanzhou, Qingdao, Zhanjiang and Weifang.
Northwest Europe & the Med
In Northwest Europe, the biggest builds have occurred at Le Havre, a major port in northern France, and Rotterdam, one of the largest fuel hubs in the world.
Rotterdam storage levels will become increasingly significant to the oil market because of planned changes to a key global benchmark.
Starting in October 1, S&P Global Platts will include offers of North Sea cargoes delivered to Rotterdam in the Dated Brent assessment.
Ain Sukhna, Egypt
Source: Maxar Technologies, Google
The Mediterranean region has also seen big inventory builds since January.
The largest build has been at Ain Sukhna, a terminal in the Gulf of Suez connected to the SUMED Pipeline that traverses Egypt and ends at the Mediterranean port of Sidi Kirir.
Other sites include Fos Sur Mer, home to an ExxonMobil-owned refinery in southern France, and Ceyhan, the Turkish port where oil arrives via pipelines from northern Iraq and the Caspian Sea.
USGC & Carib
As for draws, the regions where inventories have fallen since January includes PADD 3 (i.e. US Gulf Coast) and the Caribbean.
We recently highlighted the sharp inventory drops at LOOP, the only US port capable of fully loading oil supertankers.
The ongoing and planned construction of major pipelines and port facilities will help relieve any bottlenecks that would cause a glut to form inland.
Instead, it’s more likely in the future that the marginal barrel will be stored in tanks outside of the United States, raising the need for measurements in parts of the world where official statistics are either unavailable or delayed.
One candidate is the Caribbean where ample, merchant-owned storage is available.
Long connected to Venezuela’s oil industry, the Caribbean has been impacted by fewer shipments arriving from PDVSA which has been under US sanctions since early 2019.
When do you think crude inventories will erase the surplus relative to the five-year average from 2010-14? Do you agree with al-Falih’s decision to use this metric?
We’ll be following this story as it develops.
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