Full Tanks and Tankers: A Stubborn Oil Glut Despite OPEC Cuts
NEW YORK/LONDON/SINGAPORE May 19 (Reuters) - After the first OPEC oil production cut in eight years took effect in January, oil traders from Houston to Singapore started emptying millions of barrels of crude from storage tanks.
Investors hailed the drawdowns as the beginning of the end of a two-year supply glut - raising hopes for steadily rising per-barrel prices.
It hasn't worked out that way.
Now, many of those same storage tanks are filling back up or draining more slowly than investors and oil firms had expected, according to global inventory estimates and more than a dozen oil traders and shipping sources who told Reuters about storage in facilities that do not make their oil volumes public.
The stalled drawdowns shed light on the broader challenge facing OPEC - the Organization of the Petroleum Exporting Countries - as it struggles to steer the industry out of the downturn caused by oversupply. With U.S. shale oil production surging, inventories remain stubbornly high and prices appear stuck in the low-$50s per-barrel range.
The market has not strengthened enough to drain many major storage facilities around the globe - which OPEC oil ministers had hoped would be a first step toward rebalancing what has been a buyer's market since late 2014.
Estimated inventories in industrialized nations totaled 3.025 billion barrels at the end of March - about 300 million barrels above the five-year average, according to the International Energy Agency’s latest monthly report.
Preliminary April data indicated stocks would rise further, the IEA said. Crude stocks stood at a record 1.235 billion barrels.
OPEC and other non-OPEC nations - most notably Russia - are now widely expected to extend production cuts for another nine months, through March 2018.
The ongoing struggle to thin supplies has forced economists to cut their oil price forecasts. Bank of America, for instance, last week lowered its 2017 target for Brent crude by $7 a barrel to $54.
During the two-year price war started by OPEC, about half a billion barrels of crude and refined products flowed into storage facilities as oil prices hit lows of less than $30 a barrel in early 2016.
Much of the inventory build-up came as traders started using storage to make easy money on the widening spread between rock-bottom spot oil prices and substantially higher prices for contracts to deliver the oil in future months.
That price spread - a market structure known as contango - allowed traders to profit even after they paid for expensive storage in facilities such as the Louisiana Offshore Oil Port (LOOP) - the only deep-water U.S. oil port and a major conduit for crude imports - or supertankers parked offshore in Singapore.
Although the storage trade has been less profitable since the OPEC production cuts, much of that oil remains in tanks, said Chris Bake, an executive committee member at Vitol, the world's largest independent trader, during an industry conference last week in London.
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