Downstream Markets – Refined product surpluses will remainThe steep decline in crude prices over late 2014, and the lack of a sustained recovery since, continue to bring to the forefront discussions about the massive inventory builds as well as available storage capacity. Market balances for both crude and products are very long, and our analysis suggests this will remain the case. Thus, we continue to see big challenges ahead for crude and refined product markets. The question now is how a further implied surplus will manifest itself?
Our modelling of demand and supply, as well as upstream and downstream trends, indicates that most of this excess will translate into additional crude stocks (see chart). While crude inventory capacity is more ‘maxed out’ than refined products, at over 90% utilisation according to our estimates, we nonetheless see more flexibility and more new crude storage capacity coming online than for refined products.
Even so, the overhang in current product inventories is already huge, in particular for middle distillates, which we assess to be 11% (or 120 million barrels) above the average of the past five years, at 1.2 billion barrels (total light distillate stocks meanwhile are a ‘mere’ 40 million barrels or 5% higher than average). Moreover, going forward, we expect gasoline/light ends balances, where persistent demand strength is likely to stay, to be tighter than middle distillate balances.
But importantly, oversupply does not necessarily mean lower prices. For us the issue is whether buyers can be found that are willing to take and store excess material. For this, two conditions must be met – there must be sufficient storage capacity and price incentives must be in place. That said, China accounts for virtually all of the observable global stockbuild in the past 2 quarters, suggesting that it is willing and able to absorb much of the global surplus.
Broadly speaking, while price incentives to store more barrels are currently not in place, our outlook indicates that pressure on near-term futures contracts may be in the offing, as the growing surplus our models suggest becomes more and more apparent. Besides onshore storage capacities, we also see the potential for storing significant volumes of oil at sea over the next 6 months, not least given currently-low freight rates and ample tanker availability.
Looking ahead, our balances imply continued stockbuilds throughout 2017 and 2018 of around 600,000 b/d on average. Thus in our base case, we only expect a ‘rebalancing’ of oil markets, in the sense of supply and demand being more aligned, to take place by 2019/2020. Until then, crude and product surpluses will persist and will require creative solutions to store.
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