Oil stocks overflowing
Will the shore turn the ship? Oil prices are rising sharply today. The more expensive oil has a number of causes. Firstly, there is a very practical cause. As a result of the enormous oil production, oil tanks and bulk carriers worldwide are rapidly becoming overcrowded. Soon, not a drop of oil can be stored. That’s why the overproduction will eventually have to go down and then the price of the slightly scarcer good can go up. Yesterday, the American energy agency EIA came up with the weekly oil stocks. Logically an increase in stocks was expected. But instead of an increase of 3.997 million barrels, the EIA yesterday saw an increase of no less than 13.834 million barrels. The total stock now amounts to 469.2 million barrels. A much more substantial increase than expected, which means that all of it has to be stored.
The increase in stocks is in fact not so much due to Saudi Arabia having opened the oil tap wide, but much more due to the drop in demand. Thanks to ‘social distancing’ by the prevailing coronavirus a lot of people work at home. Cars don’t drive anymore and most planes stay on the ground. For example, the City Mapper Mobility Index indicates that world cities such as Paris, Rome, New York and London currently only show 4 to 10% of normal mobility movements in a day. Experts estimate that around 20% of global demand for oil has disappeared. With global oil production in the region of 100 million barrels a day, 20 million barrels would therefore need to be stored every day. A production limitation in Russia and Saudi Arabia of 2.1 million barrels a day (an OPEC agreement that expired yesterday but was previously breached by Mohammed bin Salman) would then not have that much effect.
Russia sees no point in stepping up production. That’s why they announced yesterday that they would refrain from doing so. The decision of the Russians could also be interpreted as a friendly gesture to the Saudi’s of course. Maybe the two ruffs will still consult each other after all. Today, oil prices also receive support from China, the largest oil importer in the world. The Chinese announced this morning that they are going to replenish the state reserves now that the oil price is so low. And last but not least, Trump is making himself heard again. To protect his own oil industry (mostly Republican voters) he announced that he wants to meet with several oil CEO’s tomorrow to discuss what measures could be taken. Trump himself is thinking of his well-known trick: increasing import duties. This time on Saudi oil entering the United States.