Oil storage is currently the only demand on the crude oil market. The coronavirus pandemic (Covid-19) has obliterated consumption and forced producers and traders to store more oil on the water as onshore facilities near the longshoremen. While India will fill its caves with crude, the lack of space means that it is also a lost opportunity.
The world’s third largest oil importer plans to fill its strategic oil reserves (SPR) in the coming months. India’s combined capacity of 5.33 million metric tonnes (mmt) at three sites in southern India – Vishakhapatnam, Mangalore and Padur – is just over half full.
The timing is close to perfection. Analysts agree that oil prices will remain under pressure. S&P Global Platts Analytics sees Brent trading below $ 20 / barrel over the next few months before rebounding to $ 40 / barrel by the end of the year. Even the recovery price is low by recent standards and depends on the form and timing of coronavirus recovery when people return to their cars.
But when it comes to SPR, India lags behind the main consumer countries and its Asian neighbors such as China, Japan and South Korea. The total capacity of China is 550 million barrels, the SPR of Japan is 528 million barrels and South Korea has 214 million barrels. That compares to a meager 39 million barrels for India, which equates to just nine days of coverage in the event of a disruption, compared to 198 days for Japan at the other end of the spectrum.
India’s reluctance stems from the high costs of participation. Not only to build the necessary reservoirs and infrastructure, but also to maintain and conserve the oil.
That said, the Indian Cabinet approved an additional 6.5 million tonnes of SPR in the second phase given the country’s dependence on oil. Crude imports from India averaged around 4.5 million barrels per day (b / d) in 2019.
It was the global storage levels that acted as a barometer of the glut of the oil market and that is why commentators remain bearish despite optimism around an agreement to reduce orchestrated OPEC + production. There is little to be gained by net oil consumers to help them, even if they can, and the burden should therefore remain on the shoulders of the Middle East and Russia.
Platts Analytics sees global storage levels fill in May. Land-based stocks are filling up quickly and participants have turned to 400 million barrels of floating storage, driving up ship freight rates. Platts estimates that up to 40 supertankers and 20 Suezmaxes are already long term leased. Some supertankers have been reserved to store crude oil for up to three years, potentially the longest time ever recorded for floating storage.
Draining stocks on land and at sea can take years and with any production reduction agreement that may take time to take effect, market forces will likely have done the damage by then. Jeff Currie, head of commodity research at Goldman Sachs, told Platts this week that with the lack of storage, the time it takes for any reduction in production to take effect and that the reduction will not match loss of demand means that could be “too little, too late” for the oil market. The same goes for India’s plans to store crude oil.
Paul Hickin, based in London, is Associate Director of S&P Global Platts. The views are hers.