Brent oil price reached lows of $27/bbl in mid-January, but has recovered over the past two weeks to above the $30/bbl mark. Nevertheless, volatility is expected to remain as the market is yet to find a new equilibrium.
So far, only modest cuts in US shale production have been realised, and global oil supply has continued to increase, writes Douglas Westwood’s Iva Brkic in the DW Monday report.
Nevertheless, in spite of the oversupplied market, OPEC – led by Saudi Arabia – continues to pump in order to defend its market share against non-OPEC supply. With a coordinated change in strategy highly unlikely, prices will have to remain lower for longer to force the market to reach a new equilibrium.
However, a critical turning point – when a produced barrel no longer finds spare capacity within existing onshore storage – is approaching. According to the IEA, global oil stocks increased by 1 billion barrels in 2015, and the Agency expects a further increase of 285 million barrels over the course of this year.
In the case where onshore storage gets filled, the excess barrels will need to be stored in the form of floating storage, which is a more expensive option. Despite the high cost, this would not be without precedent: in 2009, trading companies stored circa 120 million barrels offshore in 64 tankers.
In order to make this type of storage economical, the market would need to be in a state of “super-contango” – a situation in which the front few crude spreads are wide enough to cover the costs of storage in tankers. This implies that prices may need to remain lower for longer than previously anticipated. Current market trends suggest that widespread filling of offshore storage is likely before significant erosion of supply takes place and the market eventually starts to rebalance.