Wednesday, October 21, 2015

Oil Glut

WTI  down $1.03 at $45.26 after dipping as low as $44.86. 
We got lucky with the timing of yesterday's "Oil Company Stocks: Where We Are and Where We Were (XLE; XOP)" as both the ETFs closed down, 1.23% for the XLE and 3.40% for the XOP.

Back in the spring, oil prices plunged to 7-year lows amid fears that U.S. inventories were going to fill to the brim. As we all know now, that didn’t happen – although they did peak at a mighty 490 million barrels. 
Fast forward six months, and the global crude market still resembles a saturated sponge trying to mop up an additional two million barrels per day of excess supply. Fears of running out of storage space in the U.S. during the refinery maintenance season have retreated. Instead, a much scarier specter is haunting the oil markets: that of global storage topping out. Some would dismiss this out of hand as preposterous, but read on. 
What started as hints of congestion in early September has morphed into a body of evidence for swelling floating storage. A rapid spike in freight rates in recent weeks for VLCCs (very large crude carriers) was initially interpreted as a bullish phenomenon, driven by surging demand from China. 
This was not a wholly unreasonable conclusion to jump to; it is common knowledge that China has voraciously been filling strategic petroleum reserve sites in areas such as Huangdao and Shandong this year. In addition, the Chinese are historically renowned for going on bouts of bargain-hunting amid lower oil prices – an opportunity that the recent swoon in prices has presented in abundance. 
But as a build-up of oil tankers outside Chinese ports have proven in recent weeks, the spike in freight rates is not due to a ramp up in demand, but instead due to over-congestion. Wait times outside Chinese ports have lengthened considerably, although producers have the consolation that those barrels are already committed to an end-user. 
The situation in the U.S. Gulf is not much different. Over the last couple of weeks, vessels have been sitting at anchor for longer before off-loading. This has pushed the total overhang sitting off-shore in the Gulf close to 20 million barrels, double the usual volume that is waiting to discharge. To put this into perspective: This is an entire week’s worth of imports for Gulf Coast refiners. 
Further signs of oversupply have come in the form of idling vessels, laden with crude, sitting off the coast of Singapore. This indicates one of two scenarios: either no buyer can be found for the crude, or that the buyers have no place to store it. This anomaly was even alluded to by the IEA in their monthly oil report out earlier this week, highlighting that oil at trading hubs in Europe and Asia is being stored on ships, even though the economics don’t seem to justify this move....MORE
The EIA's inventory report was a pretty big build, larger even than yesterday's American Petroleum Institute estimate of a 7.1 mmBbl increase. For bulls the only bright spot was a small drawdown in gasoline supplies.
" Oil continues to decline after EIA reports 8 million-barrel jump in crude supplies"