Crude "Tipping Point" Arrives: China Runs Out Of Space To Store Oil

Tyler Durden's picture

It was just two days ago when we reported that according to Goldman calculations, the world was dangerously close to an almost unprecedented event (with two exceptions: 1998 and 2009): running out of space to store crude distillate products.

As a reminder, this is what Goldman said: "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.

Then moments ago the EIA reported that despite Goldman's concerns, and despite yet another inventory build in the U.S., which rose by a further 3.4 million barrels,  as US production rose once again, Cushing inventories actually declined further, dropping by 785K, following a -78K decline a week earlier.

The DOE update, together with the algo trade documented earlier, led to a massive surge in oil.

This data was fitting with what we have seen outside the US. Earlier this month, we reported that supertanker day-rates has soared to over $100,000 for the first time since 2008 even as Saudi Arabia was slashing its price (to a $3.20 discount to the benchmark with the largest price cut since 2012) which suggested that in an effort to shore up its reserves and capture more market share amid dwindling demand (and excess supply) - a price war has begun led by US ally Saudi Arabia, and China is hoarding crude at these low-low prices.

* * *

And then something very unexpected happened: the world quietly hit a tipping point when, according to Reuters, China ran out of space to store oil.

In a report explaining why "oil cargoes bought for state reserve stranded at China port" Reuters notes that "about 4 million barrels of crude oil bought by a Chinese state trader for the country's strategic reserves have been stranded in two tankers off an eastern port for nearly two months due to a lack of storage, two trade sources said."

One tanker, the Ocean Lily, loaded oil from the Omani port of Mina Al Fahal, Reuters' shipping data on Eikon showed. It is unclear what crude Plata Glory is carrying.

The oil was part of a total of at least 6 million barrels of crude bought by Sinochem for government stockpiles, but destined for a commercial tank farm in the city of Weifang, connected with Huangdao with a pipeline, the trader and port source said.

The tank farm, with total storage of about 25 million barrels, is mainly owned by Shandong Hongrun Petrochemical Co, an independent refinery partly owned by Sinochem.

The delays will cost millions of dollars and indicate how China is struggling to import record amounts of crude if storage and port capacity at Qingdao, its largest oil import terminal, are unable to keep pace.

Ocean Lily and Plata Glory, two very large crude carriers carrying oil for Sinochem Corp, arrived at Huangdao, Qingdao's main oil terminal, in early September, and both were still at anchor this week, waiting to unload, according to Reuters' shipping data, and trade and port sources.

Qingdao Port

Meanwhile, as noted above, China has been scrambling to buy ever more oil, which is currently en route to Qingdao and other ports, where it took will remain inert as there is absolutely no uptake capacity at this moment.

According to a senior trader familiar with Sinochem's oil trading and cited by Reuters, the tankers "are both for SPR (strategic petroleum reserve), but no tank space is available to take that oil in."

As reported previously, China's crude oil imports rose nearly 9 percent in the first nine months of the year over a year earlier to 6.65 million bpd, driven partly by reserve building.

The problem, as this incident reveals, is that while China has been doing what it does best: stockpiling commodities, it has had far less end demand for the raw material, and as a result the crude pipeline has gotten clogged up. And now, it appears that even oil meant to fill up its SPR (coming at a time when the US announced it would begin selling millions of barrells from its own Strategic Petroleum Reserve), is unable to get to its destination.

China said late last year the first phase of the government's emergency stockpile is storing about 90 million barrels of crude oil, with the construction of a second phase due by 2020, partly through private investment.

Huangdao is the site of one of China's first SPR tanks, with space for 20 million barrels of oil and also has plans for a second phase of similar size.

A recent move to increase competition for oil imports by granting quotas to independent refineries has added to congestion at Huangdao, where operations were already hampered following a pipeline accident two years ago. "Storage and berths were not ready for such a quick market opening," the trader said.

* * *

Broker reports show that Sinochem owns Ocean Lily, while Plata Glory was fixed on a six-month charter at around $37,750 a day in April, with an option to extend for another six months, putting the cost of keeping the two vessels idle at several million dollars.

* * *

And just like that China has, if only for the time being, run out of storage facilities.

How long until this translates into an actual drop in oil purchases, and even more importantly, how long until the U.S. itself finds itself in a comparable "overflow" bottleneck, leading to the next, and sharpest yet, drop in oil prices?

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Bill of Rights's picture

So what youre saying is China is fully stocked for the coing global war?

 

Ok noted...

Haus-Targaryen's picture

Storing this stuff doesn't really do any good for a global war, as whereever this stored is likely to be at the top of the target lists.  

NoDebt's picture

This is good news for me.  It was getting pretty expensive driving around my "Mad Max" car the last few years.  Now I can tank it up for less than $50.  At 8 MPGs, it matters to me.

Boris Alatovkrap's picture

Boris is sympathetic with China problem. Many year back, Boris is of course cannot as afford for purchase of Gold or PM, so is think maybe purchase future option. But is still expensive for Boris, so is look at less cheaper commodity enterprise and friend is give tip on cardboard. So Boris is purchase Cardboard Future, but is not realize at exercise, must is take possession. This is obvious problem in multi-family apartment dwelling.

boogerbently's picture

So, is this why shipping is down, all the ships are being used for "storage".

Two Theives and a Liar's picture

Boris! If you live in one of the big cities in the USA, you can rent that cardboard out for a good price! Homeless use it all the time for their "dwellings".

Boris Alatovkrap's picture

Da! This is good idea, no? But Boris is inquire for shipping of cost and from Minsk to Detroit is cost prohibit. But other than that, is good idea! Spasibo!

LoneStarHog's picture

So by your logic the best way to prepare for war is to not prepare?...Ammo, weapons, food, energy, etc.?...All of these will be primary targets, so it is best not to establish such targets?...Uh! Yeah!...I understand...

Haus-Targaryen's picture

What I am saying is storing this stuff in massive tankers off the coast because you have no place to put it has two problems, 

One is economic, every day you have to spread that $37k over every barrel on the ship.  After a period of time, it makes no economic sense to store it anymore.  If storage costs were zero this would be a sifferent conversation.  

Next, if global war is the prizim we are looking at this through -- storing flammable material essential for your war effort in a big metal tin can 3 kilometers off coast doesn't seem to very wise now does it?  

China should be pumping this into every old mine they have.  No storing it off coast in a coffee can with a large motor.  

Stuck on Zero's picture

No place to store it? Good grief. This is China. It will end up in cooking oil, infant formula, and pet food.

Hugh_Jass's picture

LOL! And then all of the Yanks can consume those products by buying them at their local Wal-Marts!

Sounds like a lawsuit-in-the-making...call some ambulance chasers!

froze25's picture

Anyone notice that the price spiked about the time of this article?

Boxed Merlot's picture

storing flammable material essential for your war effort in a big metal tin can...

 

I didin't realize the US was selling strategic oil into this depressed market, but it shouldn't surprise me.  Our reserves have historically been off limits with drawdowns limited to token releases to assure access as we pump ours right back into the ground in engineered salt cavities.  Pretty ingenious method of storage actually.  Don't know of other methods used around the world, but at least it seems to still be working.  We buy at the highs and sell at the lows.  Bullish.

NotApplicable's picture

They're selling due to the debt-ceiling shenanigans in order to raise cash.

Hippocratic Oaf's picture

Storing this stuff doesn't really do any good for a global war, as whereever this stored is likely to be at the top of the target lists.                                         

 

 Only if it's placed in hospitals or schools

RealistDuJour's picture

So what you're saying is that it doesn't make sense to store oil in large, mobile, scatterable, floating depots in case of war?  Gotcha.

o r c k's picture

Massive particulates that'll increase nuclear winter. Hooray !!

WTFRLY's picture

They should release a rap video with all the oil and gold they have acquired. Make It Rain Remix - Make It Yuan ft. Jackie Chan & Lil Wayne

roadhazard's picture

Only until the first missile.

RawPawg's picture

Phase 2....start using it(gotta make more room..first in,first out)

 

WAR???

NEKO's picture

Peking Ducked.

Dr. Engali's picture

Now that China has stockpiled plenty of oil they need to follow the U.S lead and sell it so they can fuel moar spending. See, problem....., solution. Anything I can do to help.

No.Fifth.Turning's picture

Buy high, sell low.  Brown's Bottom investment stragety works well for .gov. Hey, it's just clams!

bonin006's picture

Brown's Bottom was not an investment strategy. It was done under orders to save banks that were in trouble due to being short Au (back when even banks still had to cover their shorts at some point).

TRM's picture

You are half correct. Stockpile at a cheap discount (say 10%) then sell at a slightly less generous discount (say 5%) and make 5%. This also drives the price lower and then China will wash rinse repeat.

As long as their domestic demand is low why not? China has some very astute folks who know how to make a buck or trillion.

cpgone's picture

Build more storage tanks. Shovel ready.

Problem solved

NotApplicable's picture

I'm thinking buckets. Lots and lots and lots of buckets.

ParkAveFlasher's picture

Time to blow up a depot or something.  Instant consumption.

pods's picture

If they frip the boat they can refill them?

Bonus.

Dr. Engali's picture

I'm Paul Krugman and I approve this message. ^^^^

Armed Resistance's picture

Oversupply? Declining demand? Yeah, we should see $5 gasoline again in California real soon in this bizarro world we live in where everything is backwards and upside down.

pachanguero's picture

oil headed down......deflation baby

Billy Sol Estes's picture

Stockpiling for a war.

Dr. Engali's picture

Why do the Germans put up with that bitch? Nevermind...., why do we put up with Obama? All part of the no borders, no culture globalist crowd. 

Consuelo's picture

"I don't want any of this nationalism shit..."

 

 

BlindMonkey's picture

She is the Barry Soetero of her time and place.

yogibear's picture

Places like Illinois and California will fix this. They are tax happy. They'll just add a $2.50/gallon tax to it to fund their outrageous public pensions.

Sloth Dabski's picture

I live in Illinois and fuck those POS politicians and unions that are ass-raping us!

roadhazard's picture

Unions = 5% or less of the workforce. Illegal mexcans have more clout.

Publicus_Reanimated's picture

You are mistaken Jerry Brown sold out the state to public employee unions his first two terms.  Now you do not get elected as a Democrat in California without union support.  Period.  If you cross them, they will mount a recall effort.  Ask the mayor of San Jose.

venturen's picture

WTF...you left out NJ & CT they scam pensions with the best of them

Raymond_K._Hessel's picture

Oh I suspect we're just a cruise missile or 3 away from a nice spike in oil speculation-price.

youngman's picture

They can get a loan on all that oil..use it as collateral...right....do it several times is OK too....

Consuelo's picture

 

 

Any inside baseball on feverish construction of land-based petro storage tanks going on near any of those coastal ports...?   How long can crude be stored...?

 

 

roadhazard's picture

A long time in the ground apparently.

ToSoft4Truth's picture

Thinking outside the box, the Grand Canyon has unused space. 

Goldbugger's picture

QUICK STOP THE PUMPS >>>>>

venturen's picture

steel is cheap...just build more storage like us