The volume of crude in storage on supertankers at sea has fallen well below 40 million bbl from a peak of 100 million bbl last May.
Some say it may have fallen as low as 20 million bbl. "If that is right, and land stocks also reduce, the market could easily see prompt oil regain its premium to futures as demand recovers," said analysts at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, on Feb. 1. "The contango in the market has already become much narrower, down to just 50-60¢/bbl on [North Sea] Brent compared [with] around $2/bbl towards the end of last year."
Some of the middle distillate held in floating storage off Europe also was drawn down in the recent cold wave in the Northern Hemisphere. KBC analysts said 70-90 million bbl of distillate are estimated to be still in floating storage, however.
US net exports of distillates were "on the high side" at 425,000 b/d during November, "which means that on a distillate yield of 27.3%, the US refineries are running about 1.6 million b/d of crude oil to export distillates," said Olivier Jakob at Petromatrix in Zug, Switzerland. "Those are contra-economics, since these exports [were] sold into the floating stocks, which then pressure other European refineries to reduce runs as well. The bottom line is that the Atlantic Basin refineries were still burning about 1.6 million b/d too much crude oil in November."
Ethanol production
US refineries are taking a "double-whammy" from low post-crisis demand and continued growth in ethanol blending that is taking market share from refined petroleum products.
Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said it's possible even a strong recovery in global gross domestic product might be accompanied by a "fuel-less" or tepid resurgence in oil demand. "Oil demand growth in Asia is likely to be one of the most important drivers for the crude oil markets over the next few years. India and China are growing strongly as new car registrations have performed strongly," he said.
"The US is now producing about as much ethanol as it is importing crude oil from Saudi Arabia, and on the current trend we would expect the US ethanol production to be over the US import of Saudi crude oil in 2010," Jacob said. "This is good news from a perspective of US internal politics, but the growing use of ethanol in a peak oil demand environment (in the US) should continue to be a strong pressure point on the US refining system."
He noted, "Saudi Arabia is not fighting the trend, and it is abandoning its storage installations in the Caribbean to focus instead on storage installations in Japan to better service 'Chindia.' With the 1 million b/d addition of Canadian pipeline capacity in the second quarter and the continued increase in ethanol production and blending, the US is cutting its dependency on oil that costs $5/bbl to produce (Middle East) and increasing its dependency on oil that cost $70/bbl to produce (Canada and ethanol)."
Enbridge Inc.'s Alberta Clipper pipeline from Canada to the Midwest will start operating in April rather than the third quarter as previously projected. "Combined with the start-up of the Keystone pipeline this means that we suddenly have 900,000 b/d of additional pipeline capacity from Canada to the US Midwest starting in the second quarter," Jakob said (OGJ Online, Jan. 25, 2010).
The China factor
Jakob said, "China is increasing its dependency on the cheap Middle-Eastern crude and would be shooting itself in the foot by allowing sanctions on Iran that would be too harsh and that would push Iran in a geopolitical escalation."
France assumed the rotating presidency of the United Nations Security Council at the end of January, prompting speculation of UN sanctions against Iran. However, the US proposed a $6.4 billion sale of military equipment to Taiwan, and China reacted by suspending military exchanges. Chinese officials said they also will impose sanctions on companies selling arms and will review cooperation with the US on "major issues." So it's doubtful "that the Chinese will provide a helpful hand over Iran," Jakob said. They also may not help the US confront North Korea over its nuclear program or with currency and trade issues.
In other news, at the end of January in the first test of the US military's ability to respond to a simulated Iranian missile attack, the US missile defense failed to intercept the test missile launched from the Marshall Islands.
(Online Feb. 1, 2010; author's e-mail: [email protected])
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