Tanks at the nation’s most important crude oil storage centers are once again filling up, rapidly approaching the critical levels reached after the April oil price crash.
According to the latest U.S. government data, inventories at Cushing, Oklahoma, the delivery site for West Texas Intermediate crude futures, stood at 61.6 million barrels, or about 81 percent of capacity, as of Nov. 13. This is only 3.83 million barrels less than the May level.
While the negative oil prices seen in April are unlikely to be repeated, the growing oversupply in the oil market is a clear indication that the blockade brought on by the New Crown epidemic may once again force oil traders to exhaust ways to store oil, including ships and pipelines. Some oil traders have in fact already done so.
The reason behind this increase is similar to what happened before: refiners need to respond aggressively to low demand due to a renewed surge in cases of the new coronavirus. On top of that, they have seasonal maintenance costs to bear.
Says Hillary Stevenson, director of research at Wood Mackenzie.
“Even with these facilities back in service, the oversupply of Cushing crude is still overshadowing the increase in crude demand.”
Gasoline demand fell by 500,000 barrels a day last week as states reimposed restrictions, the biggest weekly drop since May, according to the U.S. Energy Information Administration (EIA).
The structure of the oil futures curve has also prompted oil traders to stockpile oil. For example, West Texas Intermediate crude WTI has been trading at a futures premium, meaning that the price of the near-month futures contract is lower than the price of the far-month contract. This means that if the spread is wide enough, oil traders can arbitrage by hoarding crude oil and then selling it at a higher price when the oversupply eases.
A similar scenario played out again in April of this year when the price of WTI crude oil plummeted to $37.63 per barrel, seven months later.
Fortunately, compared to April, the current environment has improved a bit, mainly in two areas.
First, the positive news on vaccine development has come in, providing a cushion against the oversupply of crude oil. Andrew Lebow, senior partner at Commodity Research Group, said that as vaccines become more readily available, this will help support oil demand. Although the vaccines won’t actually be widely distributed until next year, the news will certainly help support the oil market anyway.
In addition, following the negative oil price event in April, several exchanges have optimized their systems so as not to repeat the same mistakes. For example, exchanges have limited the number of crude oil ETFs in recent contracts, and pricing models have been adjusted to introduce a negative price system, meaning that the next oil price crash won’t be as overwhelming as it was in April.
At the same time, the current supply and demand fundamentals of the oil market are not as bad as they were in April.
On the supply side, a large number of U.S. oil companies went out of business due to lack of capital, resulting in a decline in U.S. crude oil production. According to the media, oil producers from the Permian to the Bakken have reduced production, and the supply side of crude oil is tighter than in April.
On the demand side, this year’s negative oil prices come against the backdrop of the outbreak of the epidemic just a few weeks ago, and the blockade policy is no longer strict. Although demand is still well below the levels seen prior to the outbreak, it has gradually recovered from its trough.
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