US unconventional oil may not, in itself, be the source of a global surplus but the substitution by US tight oil of traditional imports has reduced external demand from the world’s largest consumer and indirectly contributed to a surplus of supply that has depressed prices. So marked has the turnaround in availability been this year that the average price has dropped by some 10% from either side of $110/barrel to below $100/barrel in just a few months.
As we wrote earlier this week, China has increased crude oil imports but at the same time has increased refined oil product exports directly impacting demand from refiners in other southeast Asian markets. The net message is even China’s demand has fallen this year and their exports will reduce demand from other Asian refiners.
As spot prices have fallen the forward price curve has developed a strong contango, oil traders have rediscovered an old game, long familiar to the aluminum markets of buying spot, selling long-dated forward, storing the commodity and pocketing the profit. Unlike aluminum, of course, oil can’t be kept in a warehouse so storage facilities are being filled with oil currently available on the cheap.
The sweet spot according to an article in the FT seems to be about 3 months out after which the curve flattens and the returns are on a trend of diminishing returns. Global inventories of crude oil rose to 2.67 billion barrels in July, the highest since September of last year, according to the FT quoting the latest International Energy Agency data. But geopolitical worries about Libya, Iraq, Syria and even the Ukraine-Russia conflict are causing concern further out.
There is much debate about reports that China’s Sinopec has chartered one of two ULCC carriers capable of holding 3.2 million barrels of oil. The TI Europe is to be moored in Asia and while it is generally taken that the forward price curve is not yet strong enough to support offshore tanker storage (on-shore storage is cheaper) in the forward price play, it is possible Sinopec has the charter rate at a sufficiently low enough level to make it viable. An alternative theory is the firm is simply buying at what it considers cheap prices, depressed by a temporary surplus and maintenance at European refiners depressing demand, to buy now in anticipation that prices will rise again in the winter months.
What does seem likely from both the forward price curve and the behavior of firms like Sinopec, is that currently crude prices should not be taken as the new normal. Unlike natural gas, where US prices have remained well below world prices for several years, oil markets are more liquid, no pun intended, and arbitrages more readily exploited. Prices will react globally to a pick up in demand or a reduction in supply so consumers should consider prudently budgeting for higher prices this winter even if the current trend is still down.