US and Cheap Fuel

The impossibility of long-haul travels and the impact of the Covid-19 outbreak on the demand in transportation system in the US and many other countries have been unprecedented. Now, due to the continued virus spread, gasoline prices have been largely affected on the global markets.

Until recently, the Covid-19 outbreak was not taken seriously. However, one could distinguish to some extent that gasoline demand was not in good conditions.  The issue which was clear and remains to be is that refining facilities could not stop running and production had to continue. In the meantime, the sharp fall in global oil prices dealt the second deadly blow to the market, which was an outcome of the first problem. This time, certain producers were not affected but all refiners suffered the shock.

Modern and sophisticated refining units are operating like oil fields round the clock and they have not put off the production trend. Furthermore, shutting down oil refineries would be costly. That would not be easily acceptable to refiners.

Meanwhile, the agreement reached between OPEC and its non-OPEC allies to remove 10 mb/d from the oil market did not stop the downward trend in oil prices, putting an even extra strain on the producers and buyers of gasoline and other refined oil products. Had the oil output cut deal not been postponed to the following month and instead taken effect immediately, the oil market and subsequently the reefing sector would not have been shocked. Some nations claimed that they had commitments for April, which they had to fulfil. That served as a pretext for the postponement of the effective date of the deal. However, the Covid-19 tsunami and concomitant oil price decline did not wait for these global approaches.

Unsold Products

The volume of key oil products that is now held in floating storage around the globe has more than doubled in the past month to around 68 million barrels, according to data from oil analytics firm Vortexa.

The figure which includes gasoline, diesel and jet fuel as of April 22 is compared with around 30 million barrels in the previous month, Vortexa said.

Traders across the world have been trying to book tankers of different sizes to store oil products. Floating storage has increased in northwest Europe, the Mediterranean, the Gulf of Mexico, Fujairah in the United Arab Emirates and Singapore, as well as at other locations.

In the US, gasoline prices were expected as a way to help President Donald Trump win re-election this year. However, the Covid-19 outbreak overshadowed this political approach and gasoline prices fell so sharply that almost all US refiners or other gasoline producers prepared themselves to experience bankruptcy.

Offshore and onshore storage tanks were saturated, while demand for oil slumped significantly. That was another indication of lower gasoline prices. Under such circumstances, the refineries saw major events in their margins that could seriously push the refining industry into worse conditions.

The US oil traders, who used to base their economic activity on futures, often vouch for transportation. However, one major challenge faced with by this large group of businesspeople is that they cannot market this volume of oil. Supply trend has already overtaken demand.

The US inventories rose 48% up to April 26, raising the number of stored barrels to 55 million while storage facilities can accommodate up to 76 million barrels. Furthermore, due to the sharp decline in oil demand, 160 million barrels of oil is stored in VLCCs outside shipping ports.

Refining Industry Caught by Surprise

The oil parked on sea reached 100 million barrels in 2009. That is why this year when the oil prices went to the negative territory in the US, the day was named Black Monday.

Prices collapsed from about $18/barrel on April 17 to minus $37.63/barrel because traders could not find either a refiner or storage tank with capacity to take delivery. If you have 100 sellers and only a handful of buyers, prices will fall. In energy markets, where physical systems cannot be easily shut off, prices can enter negative territory to incentivize suppliers to cease production. In this case, traders were paying what few demand sources there were to take their oil contract.

In practical terms, the collapse in the May contract does not mean that oil is free or that you personally can be paid to take oil. Only a small number of May contracts actually traded at prices below zero. Most oil set to be delivered to Cushing next month settled at prices well above $20/barrel. Prices for June and July contracts remain above $20/barrel, as do prices for international oil deliveries. Nevertheless, the signs for oil markets ahead are, to say the least, worrisome.

The US has already stored 140 million barrels of diesel fuel, which is enough to feed industries for several months. However, the storage capacity for other oil products like aviation fuel and crude oil would be saturated very quickly. In case no solution is found more serious challenges would come up.

The US’s total jet fuel storage capacity is estimated at 40 million barrels, only 10 million barrels of which remains idle. Therefore, jet fuel owners have to find a way to store their products. That comes against the backdrop of limited air travels across the globe.

The Covid-caused lockdown has affected the oil economics to the extent that oil producers are not hopeful of overcoming this challenge in the short-term. They are praying for an end to the coronavirus pandemic so that oil flow and refining would get back on the right track.

Some believe that the countries with more restrictions would suffer the most. However, Iran that has already experienced years of sanctions would have its own remedies to deal with the current situation.

Iran Oil Remedy

As soon as the petroleum industry was overwhelmed by the Covid-19 outbreak, Iranian President Hassan Rouhani addressed a letter to Minister of Petroleum Bijan Zangeneh, laying emphasis on the diversification of refined products.

Due to oil sanctions imposed by the US on Iran following Washington’s withdrawal from the 2015 Iran nuclear deal prompted the Iranian government to significantly reduce budget dependence on oil and instead increase its economic resilience towards oil price fluctuations.

President Rouhani had noted in his letter to Minister Zangeneh that an opportunity had been created for Iran to distance itself from selling crude oil in big volumes.

Referring to price fluctuations of heavy oil in global markets and the falling prices, he said that accelerating the Ministry of Petroleum’s plans for increased oil production could minimize harm from oil price fluctuations and the oil price slump.

In light of President Rouhani’s letter to Zangeneh and plans under way by National Iranian Oil Refining and Distribution Company (NIORDC), one may hope that the Covid-19 outbreak and ensuing oil price decline would provide Iran’s oil refining industry with the best chance.

Commissioning such projects as the Siraf refining park and increasing oil refining capacity across Iran would make the Iranian president’s instructions come true.

Courtesy of Iran Petroleum 

by 

Farzin Savadkoohi