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Has the Oil Glut Disappeared?


It would seem from the IEA’s May Oil Market Report that geopolitical issues and industry disruptions are confusing the market.

Ongoing production problems in Libya, alongside OPEC+ production cuts and U.S. sanctions on Iran, as well as lower than expected output in Mexico, have raised fears of a supply crunch. In addition, attacks by pirates or terrorists on shipping near the UAE port of Fujairah and the pumping stations of a Saudi oil pipeline have unsettled traders.

On April 24th, Transneft halted shipments of contaminated Urals blend to the 1.4 mb/d (million barrels per day) Druzhba pipeline system and to tankers at the Ust-Lunga export terminal in the Baltic, which serve refineries in Germany, Poland, Ukraine, Hungary, Slovakia and the Czech Republic. As of April 25th, while the Czech Republic and Hungary have started to receive half their normal daily supply, the northern spur pipeline to Belarus, Poland and Germany was still closed, depriving European refineries of around 700,000 barrels of crude per day.

In Germany, Total’s Leuna plant has shut down and in Rotterdam some refineries are running at lower rates. It could take months to clean up the contaminated oil and will prove costly. This incident has spurred a loss of confidence in Russia’s ability to supply market grade crude and the search is on for alternative suppliers. In sum, these supply interruptions have caused a shortage of heavy and medium sour crudes which could impact prices.

To mitigate against these supply declines and disruptions, U.S. crude oil output is expected to climb by 1.7 bpd this year, not to mention the 650m barrels of crude in the strategic oil reserves, enough to meet U.S. demand for a month. Two thirds of this crude consists of sour, viscous grade, ideal for U.S. refineries. Moreover, the International Energy Agency requires its members to hold the equivalent of 90 days-worth of crude imports and China has some 300 million barrels in reserve. Also, as Bloomberg has pointed out, Russia is still pumping 11 mb/d despite the pipeline contamination.

Surprisingly, in the light of the diminishing supply picture, Brent crude prices have fallen rather than risen, from $71 on April 20th to $68 a barrel on May 28th and in the U.S., crude is still under $60 per barrel. This could reflect confidence that OPEC+ could ramp up production to compensate for supply cuts from Iran and Venezuela and still meet current global demand.

A Matter of Demand

Fortunately for crude prices, the influential IEA has reduced its forecast for oil demand by 90 thousand b/d to just 1.3 mb/d, based on evidence of lower than expected demand in major crude oil consuming markets such as Brazil, China, Japan, Korea and Nigeria. This has created a temporary crude market surplus of at least 0.7 mb/d in the first quarter of 2019 which the IEA expects will turn into a deficit of at least the same amount in the 2nd quarter. Asian buyers will likely begin to pay higher prices for Middle Eastern crude oil to replace Iranian crude this summer.

The IEA also points to a steeper backwardation (a situation in which the spot price of a commodity is higher than the forward price), perhaps indicating tightness in the market since front-month oil futures are trading $3 per barrel higher than contracts six months out.

In sum, the oil market is sending “mixed signals” states the IEA. Still, traders could take comfort in the IEA’s conclusion that there is enough spare capacity in OPEC and Russia to counter the loss of Iranian oil and prevent crude price spikes.


3 Comments on "Has the Oil Glut Disappeared?"

  1. Dredd on Wed, 12th Jun 2019 11:53 am 

    “Has the Oil Glut Disappeared?”


    There will always be too much oil (Humble Oil-Qaeda).

  2. Robert Inget on Thu, 13th Jun 2019 9:59 am 


    “DHT suspends new VLCC bookings in Middle East”

    “DHT, with 27 VLCC’s said to have announced
    suspending any new Middle East bookings. I suspect the management of Norwegian DHT ( has been in touch with Norwegian managed Frontline ( about this mornings Gulf of Oman incident that has involved Frontline’s LR2/Aframax Front Altair; as both managements were in discussions a year or so ago about a merger.

    “Would not be surprised if maritime insurance rates increase and have some impact on oil marketplace, for coverage in Arabian Gulf, Strait of Hormuz . But especially if availability of hull and contents insurance for crude and LNG vessels in that area becomes totally unavailable (I assume it is still available, but I have no way of knowing). After the 4 vessel matter a week ago, today’s 2 vessel matter risk increases”.
    (lifted from other sources)

    My take,
    Expect US exports will increase to 3 MBPD (or more)
    Shale condensates make good gasoline.
    BUT not…..

    Whats missing? The sort of heavy oil from Venezuela and Iran needed to make diesel.

    We could import more heavy oil from Canada but pipelines are already dancing as fast as they can.

    One small California oil company selling on the cheap with heavy oil (they can sell for a premium)
    Berry Petroleum (BRY)

    Another to look at, Denbury (DNR) This one too has real oil. (selling near 52 week lows)

    Shortages of affordable diesel will be inflationary,
    little doubt.
    Now that ME (heavy) oil will become unaffordable due to high insurance rates, close Venezuela becomes a sore point between China, Russia and the Trump Administration.

    Trump will again call an national emergency (on crisis he created)

  3. Robert Inget on Thu, 13th Jun 2019 10:23 am 

    “Asian buyers will likely begin to pay higher prices for Middle Eastern crude oil to replace Iranian crude this summer”.. (from above)

    China, other Asian nations will soon resume buying below cost shale oil from the US.
    (due to shipping restrictions out of the ME)

    Any increase in US shale exports will;
    #1) lower storage.
    #2) Raise gasoline prices.

    Ultra high insurance rate effects all in possible war zones.

    One great reason oil sank to $50 was/is excess
    condensate rich light oil became a real glut once
    Venezuela could no longer import.
    Now that Asia, Europe may soon develop supply problems, light oil once again becomes a hero.

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