Reserves vs. price: why production cuts will not cause a rise in price of oil


Offer vs demand

Oil prices in the coming years will stay under pressure even in the case of a reduction of global production. Even if the production and consumption of oil will regain their equilibrium, it will not solve the problem of overfilled storage capacity. The need to implement these stocks will maintain the oversupply. This is the conclusion of analysts from Bloomberg based on market expectations and forecasts of the International energy Agency (IEA).

In late February, the IEA released its medium-term Outlook on the oil market. According to the calculations of the Agency, in 2014 the excess of world supply over demand amounted to 0.9 million barrels. a day, in 2015 — 2 million barrels. The IEA expects that in 2016 the level of oversupply will decrease to 1.1 million barrels. on the day, and only by 2017, the demand and supply can be compared. In subsequent years, on the contrary, consumption will exceed demand, forcing suppliers to print reserves.

The volume of oil reserves will be reduced only in 2017, the Agency expects. “In any case, if we do not see in 2016 in a strong (more than expected) decline in production in countries outside OPEC, or the explosive growth of demand, to expect a significant strengthening of prices in the short term is not worth it,” — added the experts of the IEA.

Yet, according to the Agency, in 34 developed countries in the OECD, the total volume of oil reserves is steadily growing, updating historical records. By the end of December the figure was 3.01 billion barrels. The sixth part of this falls on US: the latest weekly report from the U.S. Department of energy shows that commercial oil stocks by the end of February rose to 507,6 million barrels. The maximum capacity of oil storage tanks in the US is 727 million barrels., in 2014, according to Statistical review BP, the average daily consumption in the country amounted to 19 million barrels.

The OECD does not include a number of large oil importers such as India and China. Official Beijing does not publish regular data on oil reserves, but in December, the government said only from November 2014 to mid-2015 the country has doubled its reserves from 91 million to 191 million barrels. Average daily oil consumption in the country in 2014 amounted to 11.4 million barrels.

According to BP, India is the world’s fourth (after USA, China and Japan) consumer of oil (3.8 million barrels. a day). In 2005 the government of India decided to build, by 2015, three storage tanks with a total volume of 37 million barrels. By the beginning of 2016, this project was almost completed, but the authorities have already announced the construction of new facilities, capable of holding 91 million barrels. By 2020 India plans to have enough reserves for 90 days of Autonomous consumption. At current levels of demand it is about 350 million barrels.

The limit

This week, Takashi Tsukioka, the head of the Japanese oil giant Idemitsu Kosan, warned: the largest producing countries are unlikely to agree on reducing production. But even if the demand and supply of oil will be re-balanced, due to an overloaded storage tanks for recovery of oil prices to the level of at least $40-50 per barrel will go at least one year. Further growth of quotations, according to him, depends on the situation in the global economy.

Japan (member of OECD) is the world’s third largest oil consumer, almost completely relying on imports. In 2014 the country produced about 16 thousand barrels. of oil a day, while consumption was 4.3 million barrels. a day. In the fall of 2014, the country had more than 420 million barrels. strategic reserves (with a potential capacity of 900 million barrels), three-quarters of which is owned by the state and only 27% were to commercial organizations. According to Moody’s, in September 2015, the accumulated reserves could ensure uninterrupted raw material consumption for 70 days, i.e. about 300 million barrels.

In Europe and the U.S. stocks are rising. Expecting higher prices, traders are buying up cheap oil, holding it “until better times” in the tanks. Because of this, by the beginning of March in Rotterdam, the largest oil hub in the Europe — storage was completely filled, and tankers lined up in the miles-long queue, waiting for the release repositories.

According to the Corporation Royal Vopak NV, the world’s largest operator of oil terminals by the end of 2015, 11 of the oil storage company in the Netherlands, were already full at 96% (against 85% in the fourth quarter of 2014). Of these, eight terminals located in the city of Rotterdam. As of February 19, according to the monitoring firm Genscape, the terminals in Rotterdam were stored 51.3 million barrels. crude oil.

In the U.S. about half of all oil reserves are scattered over the storage capacity in the South-East of the country. The largest U.S. oil storage (also included in South-Eastern region) is terminal in Cushing, Oklahoma. At the end of February the tank farm once again for the last year has updated its historical record of occupancy: this time the measure, according to the Ministry of energy, for the first time exceeded 65 million barrels. when the maximum 73,01 million barrels. Thus, the occupancy of the storage facilities in Cushing is now 89%. The historical maximum (91%) was achieved in March 2011 — prior to the introduction into operation of new terminals.

Historical maximum

Analysts Goldman Sachs have shown an inverse relationship of oil prices and stocks are at a historic example. After the economic crisis in Asia in 1997, energy consumption has started to slow down, which led to the increase in reserves in OECD countries. By the end of 1998, the peak occupancy rate storage capacity (2.8 billion barrels). coincided with low oil prices, which reached $10 per barrel. Next year start to impact the OPEC decision to cut production, volume of strategic reserves began to fall (up to 2.5 billion barrels), and oil prices for 1999 as a whole has grown almost three times.

“The market will struggle as long as demand does not exceed supply and there will come a deficit, said Bloomberg, Goldman Sachs analyst Jeff Currie. But even then crowded the store will be an additional burden, while the volume of reserves is not normal”. Average “normal” level of stocks in OECD countries over the past six years, according to the IEA, is a volume in the range of 2.7 billion barrels.