Hsueh On Oil:Floating storage drops

Tracking a return to normality

    With the twelve-month Brent curve in backwardation since September, themerchant economics of holding storage of any sort are unequivocally negative,Figure 1, but especially so for vessels chartered as a form of storage. Despitemonthly costs having fallen to USD 0.43/bbl/month in the Arabian Gulf, this is stilltoo expensive given the curve in backwardation, which means additional lossesfor a storage holder who must roll contracts forward as they expire. Thereforeglobal floating storage inventory has fallen from a June peak of 207mmbbl to 128mmbbl currently, Figure 2. The bulk of the drop has occurred in the Middle EastGulf and Southeast Asia regions. The reduction in inventory is consistent with theidea that the oil market is returning to neutral market conditions, and that demandhas been sufficiently strong to absorb the excess volume.

    However, inventories are not yet as low as observed over the 2010-14periodwhen supply-demand deficits were predominant. Therefore we believe it is tooearly to expect prices to trade sustainably above the long-term equilibrium ofUSD 65/bbl, although such conditions will likely materialise by late 2019or 2020,Figure 3. In the nearer term, we see US supply returning to stronger total liquidsgrowth of +940kb/d in 2018, and an OPEC/non-OPEC overhang of 1.3mmb/d yetto be released over the course of 2019, which should present some meaningfulchallenges to price upside above USD 65/bbl, Figure 4.