Long oil was supposed to be the most obvious trade of the year. A drop of 60% in 6 months? That can’t be sustainable people thought. So traders and speculators rushed in to buy as much oil as they could and put it in storage till the price rose again. Even the owners of the oil storage space bought oil in hopes that oil would make a V shaped recovery. And in Feburary their prayers seemed to be answered as WTI rallied from $44 to $54. But once again, reality set in. As supply rose and demand faltered, oil continued to drop reaching a new 6 year low in the past 2 days.
Now anyone who bought oil in hopes of making a profit in the future has lost money. Those loses will continue to mount as the cost of storing that oil has risen several multiples while the available storage space continues to plummet. The tanks in Cushing could fill up by as early as April, long before OPEC meets in June.
But it’s not just America who is running out of room. Storage space in Asia is rapidly running out. From Wolfstreet:
“I don’t think there is much space left to fill,” a Chinese storage executive told Reuters under the condition of anonymity. He said that in the Zhoushan area of Zhejiang province, where two SPR bases and major commercial storage facilities are located, tanks “are so full that one VLCC tanker owned by a state refiner has had to wait for almost 15 days to discharge.”
So what happens when the 2 largest importers of oil in the world run out of room? Consumption will drop. And we are already seeing that. Asian crude imports have dropped 5% from the peak in December. It appears that the Asian countries blew their load to early as oil prices are only set to fall from here. Which is devastating for the oil producers both companies and countries who need the oil revenues to survive.
People laughed at Robert Schiller when he said oil could hit $20 a barrel. With supply and demand mechanics like these he could have the last laugh. At some point production will have to be fall. OPEC doesn’t meet again till June, and before then I expect quite a few American shale companies to file for bankruptcy. I still believe the Oil and Gas sector is a great short as the market is discounting the likely hood of a further and SUSTAINED drop in oil prices.