Drawdown of huge oversupply begins

Oil traders have already sold more than 10 million barrels of crude stored in tankers off the coasts of Asia in what could be seen as the start of the drawdown of the huge oversupply and market tightening following OPEC’s production cut deal. According to shipping data by Thomson Reuters Eikon, a total of 6.8 million barrels of crude oil were taken out of storage from tankers off Malaysia’s west coast this month. Another 4.1 million barrels have been drawn down from storage tankers offshore Singapore, and additional 1.2 million barrels have been sold out of tankers anchored off Indonesia, according to Reuters data.

In the nearest term, the supply from tanker storage will increase shipments of oil flowing into Asia from regions other than the Middle East. Reduced supplies by OPEC resulted in higher prices for the Middle Eastern crude benchmark Dubai and narrower Brent/Dubai and WTI/Dubai spreads, which made the shipment of Brent-price-linked crude grades and U.S. crude shipments to Asia profitable. In the past couple of months, traders have been profiting off sending oil cargoes from the North Sea, West Africa and the Americas to the Asian markets, cutting in into the market shares of the Middle Eastern producers.

Now the oil taken out of storage offshore Asia may undermine OPEC’s targeted strategy to bring the market back to balance by the middle of this year.

According to Energy Aspects analyst Virendra Chauhan, as quoted by Reuters: “OPEC’s strategy is targeting inventories – given the scale of the overhang, the market won’t rebalance in six months – we expect an extension into [the second half of 2017].”

But in the long run, the goal to draw down oversupply would be achieved.

The traders are also selling oil out of tankers because of a nearing backwardation in the futures curve, a market situation in which prices for shorter-term delivery are higher than those for later delivery – an indication that near-term supply/demand conditions are tightening. 

“Dancing contango is now not a profitable thing to do, so we’ve sold out,” an oil trading manager who held oil stored in a tanker told Reuters.