From ongoing floating fuel storage to weak Chinese oil data on Tuesday, the two-year supply overhang that has haunted markets is not over, but the glut has eased from last year when crude was about to fall to levels not seen in over a decade.
For over two years, oil producers have been pumping more fuel than the world can consume, pulling down prices by over 70 percent earlier this year and leaving storage tanks filled with unsold crude or refined products.
Most analysts had expected supply and demand to come back into balance by the end of 2016, and as recently as October there were early indicators that Asia – the world’s biggest oil consumption region – was tightening.
A month on, however, Asia’s oil markets remain oversupplied, with tankers being chartered for floating storage as onshore facilities are full.
“There is still a significant overhang of oil… There is floating storage in and around Singapore, and (South) Korean storage tanks are full,” said Oystein Berentsen, managing director for crude at oil trading firm Strong Petroleum in Singapore.
Floating storage is incentivised by the structure of the forward price curve, known as contango, where future supplies for are more expensive than those for immediate delivery.
Because of a 16 percent price fall in front-month delivery crude to around $46 per barrel, prompt prices are now over $5 below <0#LCO:> those for November 2017 delivery, a sign that there is too much oil to be consumed.
The contango means the oil rises in value over time. Traders can lock that value in by buying prompt futures and then selling futures for later delivery and chartering tankers to hold their actual oil to sell later.
CHINA STILL WEAKENING
Falling Chinese imports is another indicator that Asia’s oil market remains oversupplied.
Vying with the United States as the world’s biggest oil importer, China’s foreign crude purchases in October fell by 12.9 percent from the record high in September to 6.78 million barrels per day (bpd), the lowest since January, customs data showed on Tuesday.
The lower imports came despite a sharp drop in Chinese domestic oil production, implying a slowdown in demand.
At the same time, China’s refined fuel exports of diesel and gasoline jumped 24 percent to 919,000 bpd from a year earlier, as refiners produced more fuel than they can sell at home.
Market participants were surprised by the China data that indicates the balance between global fuel supply and demand is still way off.
“Chinese data was a bit of a surprise considering China’s domestic production is down about 10 percent,” said Strong Petroleum’s Berentsen, which specializes in meeting Chinese demand.
Despite this, the glut is not as pronounced as earlier this year.
“Chinese oil imports… eased slightly in October but remained at elevated levels,” ANZ bank said in a note following the data release.
China’s October imports were 9.3 percent higher than a year ago, the customs data showed.
Also, floating oil supplies have eased.
The global volume of oil onboard supertankers deployed as floating storage is at 56.6 million barrels in the week to Nov. 4, shipping data compiled by Thomson Reuters Supply Chain and Commodities Research showed.
That compares with a peak of 105 million barrels last June.
The market is now focused on the ability of the Organization of the Petroleum Exporting Countries (OPEC) and other producers, especially Russia, to coordinate a planned output cut to bring supplies more in line with consumption.
“If OPEC cannot achieve a good agreement… we could see a significant drop in oil price to the mid $30’s,” Berentsen said.