Buyer Beware: Oil Stockpiles Are Enormous

(Bloomberg Opinion) - Do you remember negative oil prices and the fear that every storage tank on the planet will be filled to the brim? That seems like a long time ago since West Texas Intermediate's crude oil is now at $ 40 a barrel and inventory building is ready to reverse. The warning sent from this trip below zero has been heeded. Oil production was reduced and the crisis averted.
But if you were hoping for a quick, V-shaped recovery in oil demand, look away now.
The International Energy Agency released its latest oil market outlook last week and postponed its quarterly forecast to the end of 2021 for the first time. It cannot be assumed that demand will have fully recovered by then. For the last quarter of next year, global oil demand is forecast to remain about 2 million barrels a day below the pre-pandemic level and more than 4% below what would have been reasonably expected without the crisis.
It doesn't seem like much given the depth we are emerging from, but it will have a big impact on the oil markets and industry.
A look at the short-term outlook explains why the recovery will take time. While expectations of demand erosion this quarter are somewhat less daunting than a month ago as the blockages are eased, this was clearly the easy part. The last 10% of lost demand appears to be more difficult to recover.
Yes, the IEA revised its estimate of global oil demand by 2.1 million barrels a day in the second quarter, but it still shows a decline of almost 18 million barrels over the previous year, 18%. This is by far the largest drop in oil demand since its inception, dwarfing the 3.4% decline in the worst quarter of the 2008-2009 financial crisis.
Even more meaningful is that the recovery will slow dramatically from the third quarter.
Past demand returns, coupled with cutbacks from both OPEC + and producers outside the group - including those in the U.S. - have likely rebalanced global oil supply and demand, and inventory levels will decrease in the second half of the year of the year. But the amount of stored oil that has to be blown before the producers can pump more is huge. In the past six months, enough of the black stuff has flowed into storage tanks, caverns, and ships to drive every heavy truck in the United States five times - if everything could be converted to diesel fuel.
By the end of this month, global inventories are expected to be approximately 2.7 billion barrels higher than at the end of 2013. This is almost four times the surplus recorded after the first shale boom in early 2017 when oil prices collapsed towards $ 25 a year. This is an important benchmark as Saudi Arabia and others decided at that time the organization of the oil exporting countries would not or could not manage the oil market itself - and the wider OPEC + group was created to attract more countries, including Russia, to the table.
Their collaboration was far from smooth, but worrying for the producer community, their somewhat late actions during the pandemic were so successful that WTI crude is back at a level that will encourage American shale oil producers to pump again. That may not be high enough to drill new wells, but it is enough to reactivate some of those who closed them during the depth of the pandemic and even freak some of those that they already drilled, but had not yet finished.
It's no wonder that Saudi Arabia put pressure on OPEC + members who failed to meet their May production cut targets in May to offset lower cuts in the coming months. It renewed this pressure when the group's monitoring committee met last week and will have to monitor this deal for many months to drain these tanks with oil.
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.
Julian Lee is an oil strategist at Bloomberg. Previously, he was a senior analyst at the Center for Global Energy Studies.
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