The historic glut of oil accumulated during the pandemic has all but disappeared

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(Bloomberg) – The unprecedented glut in oil stocks that built up during the coronavirus pandemic has all but disappeared, supporting a price rally that saves producers but upsets consumers.

Barely a fifth of the surplus that flooded storage tanks in developed economies when demand for oil slumped last year remained in February, according to the International Energy Agency. Since then, the lingering remains have been reduced as supplies amassed at sea plummet and a key depot in South Africa runs out.

The rebalancing comes as OPEC and its allies keep large swathes of production offline and a temporary economic recovery revives global demand for fuel. It supports international crude prices at nearly $ 67 a barrel, a boon for producers but a growing concern for motorists and governments wary of inflation.

“Inventories of commercial oil in OECD countries have already returned to their five-year average,” said Ed Morse, head of commodities research at Citigroup Inc.’s oil reserve. “

The process is not quite finished. Considerable overhang appears to remain off the coast of China’s Shandong Province, although this may have accumulated to power new refineries, according to consultants IHS Markit Ltd.


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Eliminating the rest of the global surplus may take a little longer as OPEC + is restarting some interrupted supplies and new virus outbreaks in India and Brazil threaten demand.

Still, the end of glut at least seems to be in sight.

Oil stocks in developed economies were just 57 million barrels above their 2015-2019 average in February, up from a peak of 249 million in July, the IEA estimates.

It’s a dramatic turnaround from a year ago, when lockdowns crushed global fuel demand by 20% and trading giant Gunvor Group Ltd. feared that the oil storage space would run out soon.

Collapsing stocks

In the United States, the stockpile of stocks has already faded.

Total inventories of crude and products fell at the end of February to 1.28 billion barrels – a level seen before the outbreak of the coronavirus – and continue to hover there, according to the Energy Information Administration. Last week, stocks on the east coast fell to their lowest level in at least 30 years.

“We’re starting to see refinery racing picking up in the United States, which will be good for potential crude inventory draws,” said Mercedes McKay, senior analyst at FGE Consultants.

There have also been declines inside the country’s Strategic Petroleum Reserve, the maze of salt caves used to store oil for emergency purposes. Traders and oil companies were allowed to temporarily park the oversupply there by former President Trump, and in recent months they have quietly removed around 21 million barrels from the site, according to people familiar with the matter.


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The excess oil that has accumulated in the world’s seas is also shrinking. Ships were turned into makeshift floating depots when onshore facilities became scarce last year, but volumes plunged, according to IHS Markit Ltd.

They fell about 27% in the past two weeks to 50.7 million barrels, the lowest in a year, estimate IHS analysts Yen Ling Song and Fotios Katsoulas.

A particularly striking symbol is the emptying of crude storage tanks at the critical logistics center of Saldanha Bay on the west coast of South Africa. It is a popular place for traders, which allows them to quickly send cargoes to different geographic markets.

Inventories at the terminal are expected to fall to 24.5 million barrels, the lowest in a year, according to ship tracking data monitored by Bloomberg.

For the coalition of 23 OPEC + countries led by Saudi Arabia and Russia, the decline is a justification for the bold strategy they adopted a year ago. The alliance cut production by 10 million barrels a day last April – about 10% of global supplies – and is now in the process of carefully restoring some of the shut down barrels.

The Organization of the Petroleum Exporting Countries has always said its main goal is to normalize inflated stocks, although it is not clear whether the cartel will turn on the taps once that is done. In the past, the lure of high prices has prompted the group to maintain tight production even after reaching its inventory target.


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Mixed blessing

For consuming nations, the great destocking is less of a blessing. California drivers already expect to pay nearly $ 4 for a gallon of gasoline, according to data from the AAA Automobile Club. India, a large importer, complained about the financial pain of the price revival.

For better or worse, the rebalancing is expected to continue. As demand increases, global inventories will decline at a rate of 2.2 million barrels per day in the second half of the year, pushing Brent to $ 74 a barrel or even higher, predicts Citigroup.

“Gasoline sales are dropping in the United States,” Morse said. “Demand for all products will reach record levels in the third quarter, driven by demand for transportation fuels and petrochemical feedstocks.”

© 2021 Bloomberg LP


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