World glut of surplus oil stocks – good news and bad news for global supply chains

According to recent reports, because of the glut in oil supplies, the world is beginning to exhaust its storage facilities and may soon even fill up the offshore tanker storage space, increasing the chances of a sudden plunge in the prices of crude oil in the near future. On the one hand this could further reduce shipping costs in many global supply chains, but the long term implications could be disastrous.

In a recent statement Goldman Sachs advised clients that the increasing surplus in the amount of oil, together with the extra mild weather conditions produced by freaky El Nino conditions this year could result in the prices of a barrel of oil plummeting to $20. If this happens the barrel selling price would be at cost, and could force and end to further drilling.

The price per barrel last year was around $100 per barrel whereas as currently the price for US crude is around $40 per barrel while Brent Crude in Europe is selling for around $44 per barrel.

With the current levels of surplus being as high as they now are, Goldman Sachs are saying that it could take another 12months to get levels back down to “normal.”

OPEC and Russia lock horns

This prediction comes at a time when OPEC and Russia are locked in a tough battle over market share in both Asia and Europe, with Saudi Arabia now encroaching on Russian customer territory by supplying oil to Poland and Sweden for the first time.

Iraq is adding to the problem by selling its “Basra Heavy” low grade crude as low as $30 per barrel, and then of course there is the Iranian situation. When sanctions are lifted (which is imminent) they have another 30 million barrels waiting in the wings.

The surplus could get worse

Current estimates put the amount of oil being stored off-shore in tankers at 100 million barrels, with 39 tankers, bearing approximately 28 million barrels, queuing up outside Galveston, Texas, waiting for oil prices to rise. They could be in for a long wait.

According to David Hutton, the CEO of oil brokers PVM, stocks have been mounting steadily for two years and what has helped to keep the surplus lower than it might otherwise have been, is the fact that China has been buying between 200,000 and 300,000 barrels per day in order to top up their oil reserves. But with the current state of the Chinese economy, that topping up exercise could soon end.

OPEC may have misjudged the resilience of the US shale oil industry

Much of OPEC’s strategy of lowering oil prices was aimed at putting US shale oil production under pressure and driving suppliers out of business. But it seems that they may have underestimated the resilience of the shale industry.

OPEC countries could be caught between a rock and a hard place. On the one they need to raise oil prices to fund the cost of welfare and defense spending, (something exacerbated by the recent activity by ISIS activity), and the other hand they are fearful of how quickly US shale could again become a major contender and competitor if oil prices begin to increase.

Short term gain for global supply chains

It’s difficult to know who wins and who loses if oil prices continue to plummet. In the short term transport costs in global supply chains will come down and this could result in lower product prices. But countries whose economies rely heavily of selling oil could get into real trouble, and this could in turn affect the global economy.

 

How long do you see the oil surplus lasting and what are your predictions for its effects on global supply chains both in the short and in the long term?

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