Saudi Ara­bia emp­ties do­mes­tic crude tanks

Kuwait Times - - BUSINESS -

Saudi Ara­bia has been pro­gres­sively re­duc­ing its bloated do­mes­tic stocks of crude in a sign the global oil mar­ket is re­bal­anc­ing, al­beit more slowly than OPEC an­tic­i­pated. Saudi Ara­bia's do­mes­tic crude stocks de­clined in 16 of the 19 months be­tween Novem­ber 2015 and May 2017 ac­cord­ing to gov­ern­ment data re­ported to the Joint Or­ga­ni­za­tions Data Ini­tia­tive.

Do­mes­tic stocks fell to just 259 mil­lion bar­rels at the end of May 2017, which was the low­est level since Jan­uary 2012, ac­cord­ing to up­dated fig­ures pub­lished on Tues­day. Stocks were down by 30 mil­lion bar­rels com­pared with the same month a year ear­lier and are now down by 71 mil­lion bar­rels from their peak in Oc­to­ber 2015.

Like other pro­duc­ers, Saudi Ara­bia holds stocks for a range of rea­sons, in­clud­ing the need to cover field main­te­nance and man­age sea­sonal changes in con­sump­tion and ex­ports. Op­er­a­tional stocks are held to sat­isfy de­mand for ex­ports as well as from do­mes­tic oil re­finer­ies and power plants burn­ing crude to pro­duce elec­tric­ity.

The best way to track stocks over time is to com­pare them with the to­tal daily re­quire­ment from ex­ports, re­fin­ery in­take and di­rect crude burn. In June 2014, just be­fore oil prices started slid­ing, Saudi crude stocks to­talled 286 mil­lion bar­rels, equiv­a­lent to about 28.4 days' worth of com­bined ex­ports, re­fin­ery in­take and di­rect crude use.

By Oc­to­ber 2015, with prices well on the way to their nadir in Jan­uary 2016, stocks had risen to 329 mil­lion bar­rels, equiv­a­lent to 32.7 days' worth of com­bined re­quire­ments. Since then, stocks have been pro­gres­sively re­duced and were down to just 259 mil­lion bar­rels and 25.7 days' worth of com­bined re­quire­ments in May 2017. Saudi crude stocks dis­play a strong el­e­ment of sea­son­al­ity ow­ing to re­fin­ery main­te­nance sched­ules and in­creased crude con­sump­tion for elec­tric­ity gen­er­a­tion dur­ing the hot sum­mer months. Nonethe­less, there has been a clear down­ward trend in both ab­so­lute stocks and days of cover since late 2015 as pro­duc­tion has fallen short of com­bined re­quire­ments. The rise and sub­se­quent fall in Saudi crude stocks il­lus­trates how heav­ily over­sup­plied the crude mar­ket was dur­ing 2014/15 as well as the grad­ual re­bal­anc­ing un­der way dur­ing 2016/17.

Dur­ing the slump, Saudi Ara­bia strug­gled to find buy­ers for all its pro­duc­tion. Now the king­dom is tak­ing ad­van­tage of strong de­mand to cut ex­cess stocks to more nor­mal lev­els. As­sum­ing the data are ac­cu­rate, the per­sis­tent draw in do­mes­tic stocks likely ex­plains why Saudi of­fi­cials sound con­fi­dent when they say the global oil mar­ket is re­bal­anc­ing.

In gen­eral, crude moves down the sup­ply chain from ar­eas of net pro­duc­tion to ar­eas of net re­fin­ing and con­sump­tion. De­spite sig­nif­i­cant trad­ing ac­tiv­ity around par­tic­u­lar car­goes, the move­ment of crude es­sen­tially oc­curs in only one di­rec­tion. For com­mer­cial rea­sons, it makes no sense to move crude back up the sup­ply chain, away from con­sumers and re­finer­ies back to­wards pro­duc­ers. Crude stocks are po­si­tioned as close to re­fin­ers and fi­nal con­sumers as pos­si­ble, sub­ject to the avail­abil­ity and cost of stor­age. Stocks in pro­duc­ing coun­tries there­fore tend to be the last to fill dur­ing pe­ri­ods of over­sup­ply but first to drain dur­ing pe­ri­ods of un­der­sup­ply. The buildup of crude stocks in Saudi Ara­bia dur­ing the later stages of the slump in 2015 and the sub­se­quent draw down from 2016 is con­sis­tent with this pat­tern.

The turn­ing point in Saudi stocks in Oc­to­ber/Novem­ber 2015 roughly co­in­cided with the turn­ing point in crude prices and cal­en­dar spreads in De­cem­ber 2015/Jan­uary 2016. Saudi crude stocks have fallen much faster than crude stocks in the prin­ci­pal re­fin­ing ar­eas in­clud­ing the United States. Saudi crude stocks have fallen by 30 mil­lion bar­rels since May 2016 com­pared with a draw­down of just 6 mil­lion bar­rels in the United States over the same pe­riod.

Saudi stocks are down 71 mil­lion bar­rels since Oc­to­ber 2015 while US crude stocks are still up by 48 mil­lion bar­rels over the same pe­riod. Some­thing sim­i­lar seems to have oc­curred with the draw down in Iran's crude stocks held in float­ing stor­age dur­ing 2016.

The per­sis­tent draw down in Saudi stocks is ob­vi­ously a dis­e­qui­lib­rium phe­nom­e­non since it can­not con­tinue for­ever. Re­leas­ing pro­ducer stocks into the sup­ply chain dur­ing 2016 and the first half of 2017 added to the sense of con­tin­u­ing over­sup­ply.—Reuters

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