Brent can jump to $40 by 2020-end; India should stockpile crude oil now

Oil storage is about the only thing in demand in the crude market right now. The coronavirus (Covid-19) pandemic has obliterated consumption and forced producers and traders to store more oil on the water as land-based facilities near tank tops. While India will fill its caverns with crude, the lack of space means it’s also an opportunity lost.

The world’s third biggest oil importer is planning to fill up its strategic petroleum reserves (SPRs) in the coming months. India’s combined capacity of 5.33 million metric tons (mmt) in three locations in southern India – Vishakhapatnam, Mangalore and Padur – is just over half full.

The timing is close to perfect. There is a consensus among analysts that oil prices will remain under pressure. S&P Global Platts Analytics sees Brent crude trading below $20/barrel (bbl) over the next couple of months before rebounding to $40/barrel by the year-end. Even the recovery price is low by recent standards and depends on the shape and timing of the recovery from coronavirus as people return to their cars.

But as far as SPR is concerned, India lags behind major consuming countries and its Asian neighbours such as China, Japan and South Korea. China’s total capacity is 550 million barrels, Japan’s SPR is 528 million barrels and South Korea has 214 million barrels. That compares to a paltry 39 million barrels for India, which equates to just nine days of cover in the event of a disruption compared with 198 days for Japan at the other end of the spectrum.

India’s reluctance stems from the high costs of involved. Not only in building out the tanks and necessary infrastructure but also in maintaining and holding the oil.

Saying that, the Indian Cabinet has approved another 6.5 million mt of SPR under the second phase given the country’s reliance on oil. India's crude imports averaged around 4.5 million barrels per day (b/d) in 2019.

It is global storage levels that have been acting as a barometer of the oil market’s glut and is why commentators remain bearish despite optimism around an orchestrated production cut deal from OPEC+. There is little to be gained from net consumers of oil to assist even if they can and so the burden is likely to stay on the shoulders of the Middle East and Russia.

Platts Analytics sees global storage levels filling up in May. Stocks on land are filling up fast and now participants have turned to the estimated 400 million barrels of floating storage pushing up freight rates for ships. Platts estimates up to 40 supertankers and 20 Suezmaxes are already placed on long-term charter. Some supertankers have been booked to store crude for up to three years, potentially the longest ever duration for floating storage.

Draining the stockpiles on land and sea may take years and with any production cut deal likely to take time to take effect, market forces are likely to have done the damage by then. Jeff Currie, Goldman Sachs’ head of commodities research told Platts this week that with storage running out, the time it takes for any production cut to take effect and the fact that the reduction won’t match up to the loss in demand, means it could be “too little, too late” for the oil market. The same could be said for India’s plans to store crude.