Sunday, November 22, 2015

"Goldman eyes $20 oil as glut overwhelms storage sites"

In case you missed it.
This is actually a reiteration of a call Goldman made in September, which idea was shot down by a bunch of idiots demurrers .
Storage and the perception of storage are important, see link below.
December futures have dropped off the board, the new front-month January's were last at $41.46 down 26 cents. With October 2016 contracts at $48.02 there is more than enough room for a storage contango trade.

From Ambrose Evans Pritchard at the Telegraph:
“The world is floating in oil. The numbers we are facing now are dreadful," said David Hufton from PVM Group 

The world is running out of storage facilities for surging supplies of oil and may soon exhaust tanker space offshore, raising the chances of a violent plunge in crude prices over coming weeks, experts have warned.
Goldman Sachs told clients that the increasing glut of oil on the global market has combined with mild weather from a freak El Nino this winter. The twin-effect could send prices plummeting to $20 a barrel, the so-called ‘cash cost’ that forces drillers to abandon production. “Risks of a sharp leg lower remain elevated,” it said.
Oil has fallen from $110 a barrel early last year and is hovering near $40 for US crude, and $44 for Brent in Europe.
The US investment bank said the overall glut in the commodity markets may take another twelve months to clear. It cited ‘red flag’ signals on the Shanghai Future Exchange over recent days. Copper contracts point to “imminent weakening” in China’s ‘old economy’ of heavy industry and construction, it said.
The warnings came as OPEC producers and Russian companies fight a cut-throat battle for market share in Europe and Asia. Saudi Arabia is shipping crude to Poland and Sweden for the first time, poaching new customers in the Kremlin’s traditional backyard.

Iraq is selling its low grade ‘Basra heavy’ crude on global markets for as little as $30 a barrel as the country runs out of operating cash and is forced to cut funding for anti-ISIS militias. Iraq is seeking a large rescue loan from the International Monetary Fund. “The drop in oil prices is a difficult test for us,” said premier Haider al-Abadi.

It is estimated that at least 100m barrels are now being stored on tankers offshore, waiting for better prices. A queue of 39 vessels carrying 28m barrels is laid up outside the Texas port of Galveston, while the Iranians have a further 30m barrels offshore ready to sell as soon as sanctions are lifted.
“The world is floating in oil, and commercial stocks on land are at a record high,” said David Hufton, head of oil brokers PVM Group. “The numbers we are facing now are dreadful. Stocks have been building continuously for two years. This is unprecedented.”

“What has saved us so far is that China has been buying 200,000 to 300,000 barrels a day (b/d) for their strategic reserve,” he said.
It is unclear exactly how much more space China may have. The Chinese authorities certainly want to keep building stocks – and do so at bargain prices - since reserves cover just 50 days demand, far short of the 90-day minimum recommended by the International Energy Agency. But the new storage depots in Gansu and Xinjiang will not be ready until the end of the year, at the earliest.

Data from the US Energy Department shows that America’s storage sites are 70pc full, in theory leaving room for another 150m barrels. But this is already tight enough to create regional bottlenecks. It will not be sufficient if OPEC continues to flood the global market in a bid to drive out rivals. Excess supply is running near 2m b/d....MORE
Back on August 23 we posted "Oil Price Decline May Be Due For a (Brief) Pause".
We got lucky with the timing:
A twofer following Friday's $39.86 WTI print.
First though, some background. Back in January we and FT Alphaville's Izabella Kaminska posted on the opportunities presenting themselves in the cash-and-carry corner of the oil trade:

As We Search For A Bottom In Crude: Floating Oil Storage--Do the Math
That post pointed out that the six month contango was $6.50, more than enough to make the trade work.
We aren't there yet but at $4.00 from the October futures to the April vintage it definitely has some of the bigger houses and maybe even some of the national oil companies firing up their slide rules.
In late May with WTI at $56.74 down 77 cents we posted "The tanker market is sending a big warning to oil bulls". Early but not wrong. Here's how the action turned out:

We expect lower prices this autumn but for now $40.29 seems like a reasonable place to stop falling or maybe even bounce a bit....