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Analysis - Global oil glut burns off as demand recovers
November 24, 2010 / 3:13 PM / 7 years ago

Analysis - Global oil glut burns off as demand recovers

NEW YORK/SINGAPORE (Reuters) - An oil glut that has weighed on prices for two years is dissipating, with U.S. stockpiles falling their fastest in over a decade this autumn, crude being whisked ashore from storage at sea, and China running refineries near full bore to replenish diesel supplies.

Oil stocks are still well above levels that preceded a 2008 price surge to $147 a barrel, but a massive oil surplus accrued during the global economic downturn is being burnt off.

That could leave oil prices -- now trading near $81 a barrel after they fell from two-year highs above $88 this month -- more vulnerable to upward surges.

Oil plummeted to $33 as recently as last year as inventories soared, even after the Organisation of the Petroleum Exporting Countries cut output targets by 4.2 million barrels a day (bpd) in late 2008, the most in the cartel’s 50-year history.

As OPEC keeps a tighter lid on production, world demand is recovering faster than most forecasters, including OPEC itself, had expected. Daily oil demand this year should break a previous record set in 2007, analysts say.

“Earlier we heard people say it could take five years to return to record demand levels,” said Jan Stuart, global oil economist at Macquarie in New York.

“But we have reached them again and are surpassing them.”

Runaway growth in China has helped, with recession-wary U.S. consumers still using less fuel than in 2007.

Emerging markets make up about 80 percent of new demand, but stocks are declining in slower-growing OECD countries too.

In top oil consumer the United States, total crude and oil product stocks have fallen by 38 million barrels since mid-September, the biggest autumn drop since 1999.

(Graphic on autumn U.S. oil stocks:

U.S. stocks at 1.1 billion barrels as of November 19 were 9.3 percent higher than in the same week of 2008, just months after oil prices peaked. But stocks are down 3.3 percent since reaching an all-time high this September, government data shows.

Global oil inventories fell 76 million barrels since August and the oil market is in a seasonally-adjusted deficit of 1.3 million barrels a day, Goldman Sachs analysts wrote on Monday.

Unrelenting Chinese demand has thrust Asian refiners into competition for crude, allowing Saudi Arabia to increase the premiums it charges on eastbound cargoes for next month.

Refined oil stocks held by China’s two biggest oil companies have fallen in eight consecutive months, and diesel stocks plunged 14 percent last month alone, a Chinese industry official told Reuters on Monday.

The cost of chartering tankers has risen, even as one trend that was lifting tanker demand has nearly disappeared. During the 2009 glut, major oil traders parked over 100 million barrels of crude in offshore ships to profit from a steep market contango, when oil for delivery further out is priced higher than prompt oil.

The contango continues, but crude stocks held at sea fell by as much as 90 percent from record levels last year, said George Los of shipbrokers CR Weber in Connecticut.

Refined or “clean” fuel products held at sea globally fell more than 25 percent in the month period through mid-November, shipbroker ICAP said.

Stocks have also been shrinking at the onshore oil hub of Cushing, Oklahoma, where U.S. oil futures are delivered. They fell 11 percent from a record 37.9 million barrels in May.

Recent French port and refinery strikes cut fuel stocks in Europe, lifting demand for U.S. exports of diesel. U.S. distillate demand is up by double-digits this month versus year-ago levels, and crack spreads -- a refiner’s profits from making distillates -- are above $14 a barrel. That’s far from a 2008 peak over $30, but quadruple the lows reached in 2009.


In Asia, gas oil crack spreads, or the fuel’s premium over crude oil, neared $15 a barrel last week, the widest in 22 months. Refiners in China, Japan, India and South Korea were competing for January-loading crude from ports in Abu Dhabi, Malaysia, Russia and elsewhere.

That sent Middle Eastern Gulf crudes like Murban to their highest premiums of the year, while Malaysia’s Petronas PETR.UL priced light Tapis crude for January near $90 a barrel, a record premium to benchmark crude.

China accounts so heavily for new demand that its consumption patterns and policies are now central for market watchers. World oil prices have been falling since mid-November as China battles its highest inflation rate in 25 months with monetary policy aimed at slowing growth.

China may surprise oil markets in 2011 with plans to rely more heavily on natural gas, renewable fuels and nuclear power over the next five years, Bernstein analysts said last week.

Diesel demand may slow in China if recent government-mandated power cuts end, since they brought more small diesel generators into action.

“We think that it is a temporary phenomenon,” said Richard Jones of the International Energy Agency.


But most analysts think Chinese demand will keep soaring. Macquarie sees it rising at least 5 percent next year.

Tighter oil markets may reverse a recent price rout. Crude has fallen 6 percent since hitting a 25-month high of $88.63 on November 11. Nevertheless, few forecasters have cut their bullish longer-term price outlooks.

“Overall, we still see this dip as a buying opportunity as the oil market continues to work its way through inventories at a rapid rate,” said JP Morgan analysts led by Lawrence Eagles in a note on Friday.

Goldman Sachs sees oil prices rising above $100 in a year.

In tight markets, supply considerations come to the fore.

OPEC’s top producer Saudi Arabia holds about two-thirds of the 6 million bpd spare production capacity among OPEC’s 11 members who adhere to output targets, JP Morgan estimated.

OPEC meets next month to discuss production, but most analysts don’t expect targets to change. Saudi Oil Minister Ali al-Naimi said recently that prices between $70 and $90 a barrel were comfortable for consumers.

On most days this year, oil has traded in tight correlations, rallying, as it did on Wednesday, when U.S. equities rise and the dollar weakens against a basket of foreign currencies. Tighter supply may allow oil to rise with less regard to whether other financial markets support it.

“The tighter oil market may help oil prices break away from the correlations we’ve seem them trading in,” said Macquarie’s Stuart.

Editing by Marguerita Choy and Lisa Shumaker

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