SINGAPORE: A 10% decline in oil prices since late May could push traders to keep crude in storage, looking to sell down the line when forward prices are higher.
That would undermine the impact of supply cuts led by the Organization of the Petroleum Exporting Countries (OPEC), which partly aimed to force traders holding oil in storage to sell to reduce bloated inventories that have sapped global prices.
Brent crude futures for delivery in half a year’s time were this week around US$1.50 per barrel above current prices, a market structure known as ‘contango’ that makes it profitable to store fuel instead of selling for direct use.
Shipping data shows that at least 15 supertankers are sitting in Southeast Asia’s Strait of Malacca and Singapore Strait, filled with unsold fuel.
While that is less than in previous months, traders said that volumes in storage could easily pick up.
“If contango lasts, it’s very possible that the amount of tankers used for storage rises back to levels seen earlier this year,” said a trader who fixes floating storage deals. He declined to be identified as he was not authorized to speak with media.
Oil shipments to Asia remain high, stoking the supply glut in the region.
Trade data shows that 21.5 million barrels per day (bpd) of crude came to Asia on tankers in May. While that is down from a peak in February, it is similar to levels in late 2016, before production cuts were announced.
OPEC has so far shied away from making significant supply cuts to its biggest customers, most of which are in Asia.
And other producers, especially from the United States, have stepped up exports, further stoking the glut.
OPEC’s de-facto leader Saudi Arabia now says it will cut July crude allocations to Asia by 300,000 bpd, although many Asian refiners so far say they have received all their allocations.
Going forward, analysts said that storage levels would be key in determining the health of the oil market.
“It’s the only statistical proof the market can get to confirm or deny OPEC’s claim the market is heading back toward balance,” said Greg McKenna, chief market strategist at futures brokerage AxiTrader.