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Operational & Financial Stress Unavoidable For Energy Names, Goldman Warns Distillate Storage "Too Full For Comfort"
Distillate storage utilization in the US and Europe is nearing historically high levels, following near record refinery utilization, only modest demand growth (especially relative to gasoline), and increased imports from the East on refinery expansion and Chinese exports. As Goldman warns, this raises the spectre of 1998/2009 when distillate storage hit capacity, pushing runs and crude oil prices sharply lower. This also raises the question of whether today’s oil market can rebalance through financial stress – prices remaining near their current low level through 2016 – or if operational stress – breaching storage capacity and forcing prices below cash costs – is unavoidable.
As Goldman details, the build in Atlantic distillate inventories this year has been large, following near-record refinery utilization in both the US and Europe, only modest demand growth, especially relative to gasoline, and increased imports from the East on refinery expansion and rising Chinese exports.
As a result, and despite a cold winter in both Europe and the US last year, European and US distillate storage utilization is reaching historically elevated levels, driving a sharp weakening in heating oil and gasoil time spreads.
Such high distillate storage utilization has two precedents, leading in both cases to storage capacity running out in the springs of 1998 and 2009, pushing runs and crude oil prices and timespreads sharply lower. This raises the question of whether today’s oil market oversupply can rebalance simply through financial stress – prices remaining near their current low level through 2016 – or if operational stress – breaching storage capacity constraints and forcing prices below cash costs like in 1998 and 2009 – is ineluctable. While our distillate balances suggest that stocks will fall short of capacity, the margins of error are small and the risks highs, leaving risks to current crude oil prices and timespreads as skewed to the downside through next spring.
Tank tops not our base case, but too close for comfort
Our EU and US distillate balances do not currently lead us to expect reaching storage capacity at current 4Q15-1Q16 forward margins. The storage buffers are limited, however, at 200 kb/d in the US and 160 kb/d in Europe.
This is too close for comfort as it would take 50 fewer HDDs than normal in Europe to fill that storage – a probability of 15% to 30% each winter month. We also see risks to our forecast for European imports from the East as skewed to the upside, given strong Chinese gasoil exports, lackluster Asian diesel demand, and the potential for sustained exports from new distillate geared refineries in the Middle East. The US outlook is more sensitive to industrial activity which has disappointed lately. This holds for Canada and Russia as well – where recessions could support exports to the US – and Latin America, the key market for US exports.
Financial rather than operational stress to rebalance market
As we forecast additional distillate builds into year-end, we expect heating oil and gasoil timespreads to remain weak, currently nearly incentivizing floating storage.
A modestly larger distillate surplus than we forecast would need to push margins lower with run cuts spilling over into weaker crude timespreads and prices. For example, should EU storage capacity be reached, EU distillate production would need to be cut by 160 kb/d, requiring margins to drop by $3/bbl for runs to decline by 550 kb/d. As a result, while we reiterate our forecast that financial stress remains the likely forcing mechanism to rebalance the global oil market, with prices near current low levels required through 2016, the risks of having to balance the market through operational stress instead are non negligible.
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It'd be nice to have a couple extra refineries to convert that storage into something useable.
Yaaa, even when there is no demand for that addtl product!
US refineries operating at 86.4% cap utilization per the weekly petroleum status report of Oct 16. Compare w/
95-96% in June-July.
Debt storage capacity is the problem.
They'll figure that one out when needed.
Point is, everybody has enough oil to step into a full all out war and keep it going for a while.
I'm sure Iran will only throw 500K barrels/day on the market when "allowed" to do so. Yup, they are going to tell the real number to the same Banksters that helped sanction them to near death for so many years.
And yet diesel at the pump is $2.30/gallon
And yet diesel at the pump is $2.30/gallon
Some bankster is skimming from the petrol system.
Get out there and spend and shop you fools!!! SPEND!!!!!
Stuffing oil everywhere.
Can't help that people are broke and those in the west have to compete with that Chinese willing to work for $10/day.
All about debt saturation and world labor wage arbitration.
26 dooollaaaahhh oil?? Here i come!!!
Short WTI options starting at 60...Washout.
20s!!
Please phys silver stay low....
RIPS
Interesting article over at CNBC today about how Ameriprise and others sold investments called drilling limited partnerships to mom and pop, who have taken a 50% hit so far.
that is their job...they will buy them back once they lose 80 percent