A rapid drawdown of floating oil storage in the first quarter is a good sign for global oil markets, according to a research report from GMP FirstEnergy.
The Q1 drawdowns “likely masked” the impact of OPEC and non-OPEC supply cuts announced in January and kept oil prices from rising, the report said.
“With much less floating storage readily available to act as a source of backup supply, the production cuts should begin to have a more immediate impact on second-quarter 2017 global oil balances and going forward for the remainder of the year,” analysts wrote.
Floating oil storage is defined as a full tanker docked for at least a week. A combination of cheap shipping and oil low prices led to high floating storage levels at the end of 2016, as oil traders held back oil from refineries in order to sell at higher prices at a later date.
Even though the oil stored in ships represents only a small portion of the world oil inventory—and tracking those levels is imprecise—lower storage levels can be considered an early indicator of rebalancing crude supplies.
GMP FirstEnergy noted that Iran—which ramped up its exports after international sanctions were lifted at the start of 2016—appears to have drawn down its floating storage to near zero in Q1.
This could mean Iran’s export highs aren’t sustainable or that the country lacks production capacity to keep up with those export volumes.
GMP FirstEnergy estimated the floating storage drawdown in the first three months at 500,000 bbls/d.
OPEC production cuts announced in January amounted to about 890,000 bbls/d, while climbing U.S. crude exports averaged about 685,000 bbls/d in February.
The long and short of it?
“These developments suggest a more bullish spin for crude oil prices, as global inventories should begin to decline in earnest with the ramp up of the refining season and result in faster and deeper inventory draws over the course of 2017, including stubbornly high U.S. oil inventories,” the report said.