'Inventory dynamics': oil could slip below $40 in two months time

Published February 17th, 2015 - 09:05 GMT

With global oil supply running 1.4 million barrels per day above global demand in the first half of 2015, inventory dynamics will continue to deteriorate, leading to Brent trading below $40 per barrel over the next two months, a report said.

The inventory dynamics could continue to deteriorate in coming weeks, leading to downside pressure on near-dated contracts, highlighted the report "BofA Global Energy Weekly – “Floating oil” from Bank of America (BofA) Merrill Lynch Global Research.

Global inventories have already been rising at a dramatic pace. Total crude stocks hit an all-time record high this week of 413 million barrels in the US.

Across the OECD (Organisation for Economic Co-operation and Development) countries, crude and product inventories continued to build counter-seasonally by 23 million barrels in January. The stock surplus now sits at 50 million barrels, the widest since August 2010 when floating storage was a big factor.

“On our estimates, there are just 130 million barrels of onshore commercial storage capacity left within the OECD, most of which sits in Cushing and the US Gulf Coast,” said the report.

With onshore commercial storage capacity filling up briskly, inventories have started to build on VLCCs (very large crude containers).

“We estimate 20 million barrels is sitting in tankers right now and another 20 million barrels forward booked. By the end of 2Q15, 50-100 million barrels of crude oil may be sitting in floating storage. This compares to 110 million barrels in April 2009.

“As floating storage builds, Brent timespreads may temporarily trade in super-contango while TD3 tanker rates should move higher. We expect the Brent structure to deteriorate faster than the WTI structure, at least initially as Gulf Coast stocks will build faster than Cushing.

“In any event, super-contango in both WTI and Brent is unlikely to last for long as the global imbalance will start to improve significantly in the second half of 2015, leading to a small oil price recovery,” said the BofA Merrill Lynch research. 

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