Major supply disruptions can be a frequent feature of the oil markets with the most recent examples being Libya and Iran.
With more oil on offer, it was of no surprise to see crude prices collapse to 12-year lows of $27 - $28 per barrel in January. However, since then, global supply disruptions have increased again, Gibson Research said in a recent report.
At the start of 2016, global supply disruptions stood at 1.9 mill barrels per day, steadily increasing to 2.5 mill barrels per day by April as disruptions impacted on production in Nigeria, Kuwait, Libya and Iraq.
By May, the situation deteriorated further with wildfires affecting at least 1 mill barrels per day of Canadian production, whilst Nigeria’s 0.3 mill barrels per day Qua Iboe output ceased for a number of weeks. At the same time, concern over a deepening crisis in Venezuela added fuel to the fire.
With so much uncertainty, it was not surprising to see oil prices rally to a six month high of $49.28 barrels early last week.
However, global supply disruptions are nothing new, having averaged 2.3 mill barrels per day since mid-2014 when global crude prices collapsed. The world has simply become accustomed to disruptions, with alternative sources of supply acting as a buffer to volatile price increases, Gibson said.
Lower prices are slowly eroding these cushions. For example, US production is falling, other non-OPEC production is under pressure and signs are emerging that the crude market is starting to move closer towards equilibrium.
Some analysts have even suggested that the outages experienced this month have led to a temporary stock draw, although the world remains awash with oil. Another report from Gibson identified an increase in the number of VLCCs engaged in floating storage, at the same time as global shore based stocks remain at near record levels.
In the IEA’s latest oil market report, the agency said that in the first quarter of this year, global stocks grew at the slowest pace since the end of 2014. However, this is till growth, Gibson said.
In the US alone, crude stocks rose by 1.3 mill barrels last week, despite ongoing outages in Canada and falling domestic production.
For the tanker market, the impact is mixed. Ongoing issues off West Africa have contributed to the recent weakness in Suezmax freight, given that production from both Qua Iboe and Forcados was disrupted.
Thus, the return of these lost barrels from Nigeria should prove supportive, although the escalation of violence in the West African nation remains a major concern.
Disruptions in Canada could see US and Canadian refiners source cargoes from the Middle East, West Africa and Caribbean – if the fires persist. However, in the short term refiners have plenty of options, from drawing down shore based inventories to tapping floating storage, neither of which are supportive of the tanker market.
Tapping floating storage might cause further pain, as this move would release ships back to trade. Yet this scenario may prove unlikely considering that supply disruptions are largely centred in the West, whilst nearly all floating storage is located in the East.
It is therefore most likely that refiners will opt to both draw down land-based stocks and add incremental seaborne imports, Gibson concluded.