Peaking stock build-up sparks oil rebound hopes

Dubai - Oil time-spreads, however, are not out of the woods yet and may come under pressure again

A smaller-than-expected build in crude inventories across the world and a rising optimism that economies will be able to re-open ahead of schedule after a successful Covid-19 drug trial has spurred a rebound in oil prices, analysts said.
Analysts at BofA Global Research said the global petroleum stock builds had likely peaked in April as oil demand contracted by nearly 25 million bpd year-on-year.
"Now, countries are emerging from lockdown, boosting demand just when Opec+ cuts are kicking in and producers elsewhere are cutting output. Even so, the market should remain in surplus for the remainder of Q2 2020, resulting in continued, albeit slower crude oil and product inventory builds," said BofA.
Oil prices jumped more than 20 per cent last week after data showed the US may not run out of space to store its glut of crude as quickly as previously feared.
West Texas Intermediate for June delivery surged 22.04 per cent, or $2.72, to settle at $15.06 per barrel, after earlier trading as high as $16.78. International benchmark Brent crude gained $2.08, or 10.17 per cent, to settle at $22.54 per barrel.
Hopes of an earlier-than-expected economic recovery rose after Gilead said early results of its coronavirus drug trial showed that at least 50 per cent of patients treated with a five-day dosage of antiviral drug remdesivir improved and more than half were discharged from hospitals within two weeks.

Energy Information Administration data showed inventories rose by nine million barrels last week, less than the 11 million barrel increase projected by traders and analysts who took part in a survey. Although stockpiles are still rising quickly with oil supply far exceeding demand, the figures gave beaten-down prices a boost, analysts said.

Moody's price prediction for WTI is $30 per barrel this year, and $40 next year. For Brent, it sees prices averaging $35 per barrel in 2020 and $45 in 2021.

BofA said in a report that inventory builds, which surged following demand destruction pushing the oil market to a historic surplus, should slow from here, but oil time-spreads are not out of the woods yet and may come under pressure again.

Since March, onshore crude oil inventories built 180 million barrels and crude and product floating storage grew 220 million barrels.

"April marked a watershed month in the history of oil markets. During April, oil markets crossed the rubicon as US crude benchmark WTI futures prices temporarily crashed into negative territory for the first time in history. The world is awash with oil and where to store it is the problem. The mismatch is a particular problem for landlocked US producers, whose excess oil cannot be stored in container vessels as Brent crude, which is produced at sea, can," said Ehsan Khoman, head of Mena research and strategy at MUFG, Japan's largest bank.

Some oil-hungry Asian nations are taking advantage of the collapse in prices to build up their crude stockpiles.

China is believed to have the biggest in the Asia-Pacific. Beijing does not give an official estimate but analysts say it is at around 550 million barrels. In comparison, the United States' strategic reserves currently hold around 630 million.

State-owned China National Petroleum Corporation said recently that the country's reserves were "obviously insufficient, and have not yet reached the international standard '90-day safety line'".

Japan's oil reserves were around 500 million barrels at the end of February, equivalent to national consumption for more than seven months, according to the latest official data, while South Korea had around 96 million barrels in strategic reserves as of December 2019, enough for 89 days.

India, by contrast, has reserves with storage capacity of approximately 40 million barrels - which would last just 10 days in the country of 1.3 billion people.

Strategic reserves are stored largely in secure underground depots like natural rock caverns. The US Strategic Petroleum Reserve, the world's largest supply of emergency crude, is stored in huge underground salt caverns along the Gulf Coast.

In Asia, India uses caverns to store its reserves but other countries, such as Japan, put theirs in above-ground tanks.

Australia, which has long had one of the lowest levels of emergency stockpiles in the developed world, said it will take advantage of the fall in prices to develop a strategic reserve in the United States.

- issacjohn@khaleejtimes.com