Surplus Oil In Floating Storage Disappears

Jim Brown
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Crude prices fell slightly intraday on Thursday but the rebound was pretty quick. News of a Libyan peace plan submitted by Venezuela and being considered by the Arab League prompted the drop but realization that neither Qaddafi or the opposition forces would never agree to it produced the rebound.

The plan called for a mediation of the current dispute but I can't imagine any favorable outcome. Qaddafi has been a dictator for more than 40 years and he has treated his people terrible with torture, imprisonment and even death for just talking negatively about him. He will be lucky to escape this conflict alive much less remain a leader in Libya.

Since the crisis began we have seen output rise in several OPEC nations but it is still too early to see that output in the month end numbers. It will show up in March and it will be an indication of who, besides Saudi Arabia, has any excess capacity.

Total production by all OPEC members rose by +90,000 barrels per day in February to 29.754 million. These numbers are derived from a survey of dealers, traders, analysts and industry sources. The decline in Libyan crude was seen with production down -210,000 bpd from January levels. Since the first half of the month was unaffected that suggests a lot more than 210,000 barrels was missing in the last half of the month. Current estimates for Libyan production are between 600K and 800K per day. The IEA estimated on Wednesday that those numbers could be between 850K and 1.0 mbpd. The IEA warned that shortfalls could only be made up by other producers in the short term. If the conflict was prolonged there would be a shortage.

The IEA warned the longer the Libyan shortfall lasted the faster existing spare capacity will erode. They also warned about the impact of potential supply disruptions in Iraq due to terrorism and in Nigeria ahead of the presidential elections in April. Should outages in these countries occur "the pressure on spare capacity will be immense."

OPEC Production for February

The shortfall in Libya has already been felt in the tanker storage market. When countries don't have ready buyers for their oil they sometimes rent tankers for floating storage. These tankers are positioned close to an expected destination and they can remain in position for months depending on the market and demand cycles.

Overseas Shipholding Group (OSG) said it expects all tankers which had been used for storage to be released soon due to the tightness in oil supplies. The only tankers remaining in use for storage are from ITC (International Tanker Corporation). There are no GLCCs or Suex-Max currently being used for storage. There is only one VLCC rented for storage and that is holding jet fuel off the coast of Singapore.

In recent years there have been as many as 90 million barrels of crude in floating storage. For all of this to evaporate so quickly is a testament to the current supply/demand story.

Another factor sucking up all the available oil is stockpiling by Asian countries. Rather than risk running out of oil they are buying up everything in sight. It is not like they will never use it. They would rather have it in storage for later than face a shortage for not planning ahead.

The Philippines announced on Wednesday that all oil companies in the country must now maintain 15 days of reserves and refineries must keep a minimum of 30 days supply on hand.

China was buying for its strategic reserves last summer and is currently complete in its phase one program to build and fill 102 million barrels of reserves. Phase two starts next year to build another 168 million barrels of storage and fill it. Phase three will add another 200 million barrels in 2015.

CERA said the crisis in Libya and the unrest in the other oil producing MENA nations has probably caused a sharp uptick in strategic buying. Since countries don't publicize when they buy for their strategic reserves we will never know but the sudden disappearance of all the oil in floating storage is a significant indicator that purchases are taking place.

India only has 9.8 million barrels in reserve. That is a pittance compared to China and the U.S. and the rest of the OECD nations. If India was to embark on a strategic reserve program they would need at least 200-250 million barrels to make it worthwhile.

In the U.K. the government is trying to come up with a way to subsidize fuel costs. Gasoline has risen to $8.03 per gallon (GBP 1.3003 per liter) and is expected to go higher. Diesel prices hit a record at $8.37. (GBP1.3544 per liter) If you think that can't happen in the U.S. in a couple years you are sadly mistaken.

The sudden disappearance of the oil in floating storage is exactly what will happen when we hit "Peak Sweet™" in 2012. The available oil will be immediately bought and future purchases will involve a bidding war. Gasoline prices will not be a concern when the availability of gasoline is the number one priority.

Jim Brown

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