Oil Supply Disruptions Head Towards Historical Lows

Crude inventories draw in China and the US; supply disruptions head towards historical lows

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Q2 hedge fund letters, conference, scoops etc

Crude supply disruptions drop globally

  • Supply disruptions tracked by Kayrros have dropped again this week after production resumed at the Waha field in Libya.
  • The increasing disruption trend observed at the end of June 2018 because of fighting in eastern Libya was quickly broken, and we are now heading to a historically low level of disruptions in tracked OPEC countries.
  • Along with the diminishing spare production capacity in Saudi Arabia, this means there are not many barrels that can be added to the market in the short term in a scenario of higher than expected demand growth, or in the case of a large drop in Iranian exports.

"...There's still a lot of uncertainty about how aggressive the [US] administration will be about implementing the sanctions and about the capacity of Iran to nevertheless apply the sanctions…"

- Antoine Halff, Kayrros Founder, on CNN

Global land inventories are dropping to record levels while Brent time spreads continue to diverge from fundamentals

Last week, Kayrros reported a large draw in global inventories outside the US, while EIA reported a similar draw in US commercial crude oil inventories.

  • This translates to a massive draw for global crude storage, taking global inventories close to the multi-year low observed in Q1 2018.
  • Crude oil inventories in the Caribbean are at the lowest level on record, with low levels observed in the Bahamas, Saint Lucia and the U.S. Virgin Islands. Inventories in the Caribbean island of Curacao saw a second consecutive large draw.
  • Crude oil inventories in the Middle East region saw a small rebound from the lowest level of the year observed the previous week.

Large movements in Brent time spreads were measured last week, with the 6m-1m spread moving to an almost $1/b contango before narrowing slightly.

  • This state of the Brent term structure seems disconnected from storage fundamentals. Global inventories have moved closer to the historical lows observed in April 2018, dropping by an enormous amount since the highs of June 2018.

Chart of the Week: Electric Vehicle trends

Supply Disruptions

Source: Kayrros.

Look for our publication on EVs due out this week.

In case you missed it...

Saudi Arabia made headlines last week in their decision to temporarily suspend oil shipments through the Red Sea's Bab al-Mandeb strait after two Saudi tankers were attacked by Houthi rebels. Since 500,000-700,000 barrels pass through the strait daily, the shutdown will significantly impact shipping timing and routes. Four days later, the suspension is still in place.

The suspension of the Bab al-Mandeb strait comes shortly after a threat by Iran to shut down the Strait of Hormuz amid growing US-Iran tensions. Almost one-fifth of the global oil trade passes through this chokepoint.

In other news, the Wall Street Journal reported that “crude across the globe is being used up faster than it is being replaced, raising the prospect of even higher oil prices in the coming years.” This undermines recent concerns of a looming spike in oil prices, which would cause significant disruption in the industry.