Saudi Oil Minister Ali al-Naimi is counting on oil traders to keep sitting on near-record volumes of stockpiled crude to prevent a second relapse in oil prices later this year.
Senior traders, however, worry that his confidence – expressed on Monday in occasionally arcane market terms, unusual jargon for the world’s most influential oil official – may be misplaced.
Regardless of whether a massive global oil storage trade is rapidly unwound, world oil production has been rising much faster than consumption, feeding an unprecedented global glut on the back of booming U.S. oil output and a Saudi-led decision by OPEC to maintain high output to defend market share.
Analysts from Citi said on Tuesday that given OPEC was widely expected to maintain its output policies at a meeting on Friday, the global surplus would last well into 2016.
“We still wonder who will want to own all of that additional inventory and at what price based on what is still largely a hope that 2017 might feature a deficit,” Citi said.
The comment followed a brief, rather technical and unusual remark from Naimi on Monday.
“The market is stabilising. There is a surplus but there is a problem with the surplus,” Naimi said when asked by reporters about the growing global glut.
“This is not a good time to sell the surplus, so they (oil firms and traders) have to keep it and as the contango goes down and they see backwardation coming forward they will hang on to it, they are not going to dump it on the market.”
Contango and backwardation are two opposite market structures describing whether future prices are higher or lower than present prices. Higher future prices, or contango, usually encourage oil storage as traders and companies hope to resell oil at a profit later.
This was the case in the first quarter of 2015 when traders, oil companies and refiners stored millions of barrels of crude. Since then, they have offloaded a large chunk of it back onto the market as the contango structure narrowed.
Naimi had not used those technical terms for years – even in one of his most in-depth interviews with the Middle Eastern Economic Survey in December 2014 – and at first this puzzled traders on Tuesday.
“People will destock if they see demand for their oil. And backwardation will come then. Not the other way around,” a top executive from a major oil trading desk said.
Another senior executive pointed out that narrowing contango was precisely what had prompted him to reduce his exposure to storage and he was not planning to hold onto any stocks before the market structure went back to a steep contango again.
A third trader said some refiners in Europe – such as Austria’s OMV or Israeli refineries – had stored oil in recent months.
Unlike more agile traders, refiners could indeed hang on to stocks, as predicted by Naimi, instead of dumping them even if the market structure worsened as they could consume the oil internally.
“But it doesn’t help the glut problem in any way as it simply depresses demand for new barrels coming into the market. If I’m a refiner sitting on stocks I won’t simply buy new crude. But that brings the market even closer to another price crash,” the third trader with a major Mediterranean trading firm said.
On Monday, Naimi said he was confident about the market outlook as demand was improving and supply thinning. However, he said it might take time for the market to rebalance: “I don’t have a crystal ball but it is (going) in the right direction”.
OPEC’s own research shows non-OPEC producers will be able to raise production until 2017 despite lower prices.
“Oil demand is strong but so is supply, with supply growth concentrated in first half 2015,” PIRA Energy Group said in a research note on Tuesday. “Even with crude markets tightening in second half 2015, large volumes of crude in storage will require time spreads remunerating storage.”