Oil Storage Nears Its Limit

1. Potential debt crisis could hit commodity exporters hardest

- Emerging market assets have seen risk premiums spike, and commodity-exporting countries are seen as particularly risky.

- Venezuela, Argentina and Lebanon have already defaulted on debt payments.

- An estimated 90 countries have already turned to the IMF for emergency financing.

- Calls for a debt “standstill” arrangement at the global level are rising in order to buy time for developing countries so that they don’t face deeper crises. Absent some sort of agreement from creditors, debtors, governments and multilateral banks (IMF, World Bank, etc.) a broad debt crisis could explode.

2. Palladium market in deficit

- The market for palladium could face a deficit through 2021, despite the steep fall in auto sales, according to a report from Standard Chartered.

- The bank says that the deficit may now only be 327,000 ounces in 2020, a narrower gap than the 1.3 million ounces previously anticipated.

- More than 80 percent of palladium is consumed in the auto market.

- But the demand destruction from weaker auto sales has been partially offset by supply-side issues. South Africa, which accounts for 38 percent of global palladium output, announced a 21-day shutdown beginning on March 27, a measure that was extended through the end of April at least.

- Global supply could fall by 10 percent this year largely because of Covid-19-related supply shutdowns.

3. Oil storage nearing limits

- Global oil and refined product inventories could build at a rate of 11.9 mb/d in the second quarter, according to the IEA.

- Although comprehensive data is elusive, the IEA says the world has roughly 6.7 billion barrels of storage capacity, with 4.2 billion barrels already in use at the end of January, or 63 percent full. For operational reasons, tanks only have a utilization rate of around 80 percent – putting total storage in the range of 5 to 5.7 billion barrels.

- In other words, the world had about 1.2 billion barrels of storage available as of January.

- That means storage is on track to fill up by mid-year, the IEA said.

- But those are just high-level numbers. “Storage capacity may saturate locally before it reaches tank-tops internationally,” the IEA said.

4. Economic hit won’t go away with reopening

- The IEA, and many other forecasters, have a V-shaped recovery at the center for their forecasts. Oil demand falls 29 mb/d in April, but goes mostly back to normal by the end of the year.

- However, a V-shaped recovery is looking increasingly unlikely. An NBER paper says U.S. GDP could be 11 percent down in the fourth quarter from a year earlier.

- 22 million people have now filed for unemployment insurance in the United States.

- Europe could see GDP contract by 10 percent in the first half of 2020.

- As households increasingly cut back on spending, the economic damage will likely persist.

5. Energy stocks plunge

- In late March, the Energy Select Sector SPDR Fund (NYSEARCA: XLE) fell to $23 per share, the lowest level since 2003.

- Since then, the fund, which is comprised of large U.S. oil and gas companies and refiners, has rebounded, but was sliding again at the end of the week as WTI fell below $20 per barrel.

- The fund is somewhat of a proxy for Big Oil, with Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM) each accounting for 23 percent of the fund’s holdings.

- The downside risk is obvious – oil prices could continue to slide in the coming weeks as storage fills up. But the prospect of a V-shaped recovery could make XLE appear cheap.

6. Shuttered refineries lead to deep drop in processing

- U.S. refineries processed 12.665 mb/d of oil in the week ending on April 10, down from 15.8 mb/d on March 20.

- The sharp drop in processing comes as refineries shut down amid evaporating demand for gasoline and jet fuel. Cuts to process have not prevented a huge buildup in gasoline inventories.

- U.S. gasoline stocks rose to 262.2 million barrels on April 10, up 22.9 million barrels in three weeks.

- Crude stocks have jumped by nearly 50 million barrels over the same timeframe.

- The seizing up of the petroleum complex is starting to reverberate back to the well head.

7. Oil supply to fall 12 mb/d

- Global oil supply could fall by 12 mb/d in May, anchored by the 9.7-mb/d cut from OPEC+, according to IEA.

- Total non-OPEC production could fall by 5.2 mb/d by the fourth quarter.

- U.S. oil supply could fall by 2 mb/d by the end of the year.

- In the short run, Canada will be hit hardest and quickest, as the country lacks adequate storage. That could force “large-scale shut ins,” the IEA said. Canadian output could fall by 0.6 mb/d in April and by another 0.2 mb/d in May.