While it may seem that Harvey has resulted in bottling up crude within the US and has therefore resulted in overtightening the rest of the world’s crude market, the reality is that the disruption to exports was severe for just one week. Moreover, the draws in products have far outpaced the builds in crude. Even with end-user demand growth slowing in July and August compared to the rampant growth seen in Q2 17, identified inventories are set to draw by nearly 1 mb/d in Q3 17. As floating storage is unwound, visible stocks may rise, but this will not signify new inventory builds or a lack of draws. This is simply a part of the rebalancing process.
Impressively, these stockdraw figures include what has been pretty significant stockpiling by China, even though the pace of builds slowed to a seven-month low in August. This implies commercial stockdraws are even larger and the market is definitely trading that way.
Indeed, this is an important point to consider. On our headline balances, total 2014, 2015 and 2016 global liquids inventory builds are 1 billion barrels. Our headline draw for this year is 0.7 mb/d, or 250 mb. Arguably this figure could end up rising if August’s pace of stockdraws is anything to go by. Yet prices and spreads tell us a very different story.
But this ‘excess’ includes all the crude that has gone towards filling strategic petroleum reserves and/or new infrastructure. We describe this as one-off demand, not available for market use. While we continue to maintain that Chinese implied stockbuilds have been inflated this year, even after adjusting for this, since the start of 2014, China has filled nearly 400 mb of crude in its SPR, new pipelines and commercial tanks. Separately, crude required for linefill in the US has amounted to at least 33 mb. We estimate another 60 mb of crude has been put away in tanks associated with new refinery and infrastructure start-ups around the world. That would leave us with a true commercial inventory excess of around 150 mb at the end of this year, assuming actual draws coming in higher (1 mb/d) than our current forecast (0.7 mb/d).
Already, the only real excess in the market is in the US (+124 mb), a few other parts of the OECD (~50 mb) and private storage tanks yet to be emptied (~25 mb), so in all likelihood, stockdraws will be coming in higher than our balances currently forecast and we will likely end the year at no more than 100 mb above the five-year average, as long as demand holds up.