Historic global oil glut amassed during pandemic is almost gone
The unprecedented oil inventory glut that amassed during the coronavirus pandemic is almost gone, underpinning a price recovery that’s rescuing producers but vexing consumers.
Barely a fifth of the surplus that flooded into the storage tanks of developed economies when oil demand crashed last year remained as of February, according to the International Energy Agency. Since then, the lingering remnants have been whittled away as supplies hoarded at sea plunge and a key depot in South Africa is depleted.
The rebalancing comes as OPEC and its allies keep vast swathes of production offline and a tentative economic recovery rekindles global fuel demand. It’s propping international crude prices near $67 per barrel, a boon for producers but an increasing concern for motorists and governments wary of inflation.
“Commercial oil inventories across the OECD are already back down to their five-year average,” said Ed Morse, head of commodities research at Citigroup. “What’s left of the surplus is almost entirely concentrated in China, which has been building a permanent petroleum reserve.”
The process isn’t quite complete. A considerable overhang appears to remain off the coast of China’s Shandong province, although this may have accumulated to feed new refineries, according to consultants IHS Markit Ltd.
Working off the remainder of the global excess may take some more time, as OPEC+ is reviving some halted supplies and new virus outbreaks in India and Brazil threaten demand.
Still, the end of the glut at least appears to be in sight.
Oil inventories in developed economies stood just 57 million barrels above their 2015-2019 average as of February, down from a peak of 249 million in July, the IEA estimates.
It’s a stark turnaround from a year ago, when lockdowns crushed world fuel demand by 20% and trading giant Gunvor Group Ltd. fretted that storage space for oil would soon run out.
In the U.S., the inventory pileup has effectively cleared already.
Total stockpiles of crude and products subsided in late February to 1.28 billion barrels — a level seen before coronavirus erupted — and continue to hover there, according to the Energy Information Administration. Last week, stockpiles in the East Coast fell to their lowest in at least 30 years.
“We’re starting to see refinery runs pick up in the U.S., which will be good for potential crude stock draws,” said Mercedes McKay, a senior analyst at consultants FGE.
The oil surplus that gathered on the world’s seas is also diminishing. Ships were turned into makeshift floating depots when onshore facilities grew scarce last year, but the volumes have plunged, according to IHS. They’ve tumbled by about 27% in the past two weeks to 50.7 million barrels, the lowest in a year, IHS analysts Yen Ling Song and Fotios Katsoulas estimate.
To consuming nations the great destocking is less of a blessing. Drivers in California are already reckoning with paying almost $4 for a gallon of gasoline, data from the AAA auto club shows. India, a major importer, has complained about the financial pain of resurgent prices.
For better or worse, the rebalancing should continue. As demand picks up further, global inventories will decline at a rate of 2.2 million barrels a day in the second half, propelling Brent crude to $74 a barrel or even higher, Citigroup predicts.