Overloaded Storage Facilities Likely to Mean Even Lower Oil Prices

Source: By Benoit Faucon and Summer Said, Wall Street Journal • Posted: Thursday, March 19, 2020

A coming surge of Saudi oil could push prices to $10 a barrel or less, say analysts

A storage tank at an oil refinery in Nigeria. The Saudi-Russian price war has already driven down crude prices. Photo: temilade adelaja/Reuters
 Storage facilities around the world are brimming with cheap oil and could run out of space within months, traders and analysts say, a predicament that could drive down crude prices to unprecedented single-digit dollar amounts.

As the global response to the coronavirus pandemic saps oil consumption with factory closures and travel restrictions, the Saudi-Russian price war has caused crude prices to plummet by half to around $28 a barrel this month.

A flood of oil from Saudi Arabia and rival producers is expected to enter the market next month, adding to a surplus of oil that could overwhelm global storage. As markets struggle to find places to stockpile excess crude, “the prospect of single-figure prices…is now pretty inevitable in the coming months,” London-based consultancy FGE Energy said in a recent note.

The big wave of extra crude will hit Western economies just at a time when they are likely to feel the full force of the coronavirus outbreak, creating a surplus as large as 10 million barrels of oil per day in the April-June period, said Warren Russell, commodities strategist at Bank of America.

That means oil inventories could climb by more than 900 million barrels in the three months beginning April. As a result, “oil prices might have to trade down into the teens in order to shut in oil production,” Mr. Russell said.

One overwhelmed oil-storage facility in the Egyptian desert, filling up with Saudi crude, portends the ominous months ahead for global crude markets.

Saudi Arabia has booked all remaining storage capacity at Egypt’s Sumed pipeline infrastructure that starts in Ain Sukhna on the Red Sea and ends in Sidi Kherir on the Mediterranean, oil traders and officials said. Middle East exporters use the facility, which has a storage capacity of 12 million barrels, as a transit point to export oil to Turkey, Greece, France, Italy and Spain.

Saudi Arabian Oil Co., known as Aramco, is selling crude for delivery next month to Southern Europe at some of its most aggressive discounts—with reductions of $7 a barrel. Last week, an oil trader who tried to book storage of over one million barrels at the facility was told there was no space available.

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The fight for market share will make oil markets the most-oversupplied in over 30 years, said Norwegian bank DNB in a recent note. Even before the Saudi-Russian price war began, oil buyers had been warehousing large amounts of fuel on the high seas.

The expected surge of Saudi oil comes after Russia refused to join Saudi-backed production cuts earlier this month in response to the coronavirus outbreak. Saudi Arabia slashed its prices and said it would hike oil production by two million barrels a day to regain market share from Russia and U.S. oil producers.

As countries like the U.S., France and Italy have heavily restricted travel abroad and within their territories, oil-industry executives say the excess oil from Saudi Arabia and rivals trying to defend their market share—such as fellow Gulf producers, Russia and Nigeria—is, in many cases, going into storage as traders are buying the oil cheaply to refine it later.

With rising supplies combining with declining demand, global oil storage could fill up within four months, said Antoine Halff, the chief analyst of Paris-based consultancy Kayrros, which tracks global storage by using satellite imaging. “It’s a chess game played with a timer and each player has a very short time slot to make his moves,” he said.

China, the U.S. and India—the world’s three biggest oil consumers—are considering procuring inexpensive oil to fill their strategic reserves.

Beyond European-focused facilities like Sumed, traders have also been scrambling for storage space in places like Cushing, Okla., and Fujairah in the United Arab Emirates. In Shandong, the main hub serving Wuhan—China’s coronavirus epicenter—storage is now more than two-thirds full, according to satellite-data consultancy Ursa Space Systems. Ursa said that was the highest level it had seen since it began recording the data in December 2017.

Some operators are increasingly turning to midsize oil transport ships, called Suezmaxes, to store oil. But the costs have increased sixfold to $330,000 a day since the beginning of the month, making such an option increasingly less attractive.

The mounting glut means the Saudis and others will have to keep cutting oil prices, industry watchers say.

In Northwest Europe, for instance, where Aramco cut its main prices for April orders by the most, the combination of higher shipping costs and lower Brent means the Saudis would have to cut their prices by at least $5.50 if they want to remain competitive with others selling into the region.

The Saudi decision to pump to the fullest amid collapsing demand is a “kamikaze” strategy, said an official from one of the countries in the Organization of the Petroleum Exporting Countries.

OPEC officials and oil experts say the coming storage crisis is likely to drive Saudi Arabia and Russia back to the negotiating table to seek a deal on production cuts.

—David Hodari and Sarah McFarlane contributed to this article.