By Andy Hoffman and Javier Blas
Oil stockpiles have been building in September and won’t draw down enough in the remainder of the year to be in balance if the cartel follows through with its plan to taper production cuts early next year, Marco Dunand, Mercuria’s co-founder and chief executive, said in an interview.
“We do not need the extra oil,” Dunand said from the firm’s headquarters in Geneva.
The forecast, by one of the world’s biggest independent oil traders, is ominous for Saudi Arabia, Russia and the rest of OPEC+ who have made historic output cuts this year in an effort to save a market battered by the coronavirus pandemic. With the cartel due to discuss further easing some of those curbs from January 2021, the warning that stockpiles have been building again could force OPEC+ to reconsider.
Dunand said global oil stocks increased by 500,000 to 1 million barrels a day in September but will be drawn down by about 1 million barrels a day on average in the fourth quarter.
“We see a fair amount of oil going into ships, into floating storage, now,” he said. “We are filling up both tankers as floating storage and onshore tanks in September,” he said. “There has been a slowdown in the global rebalancing process.”
Global oil inventories built at an unprecedented rate between March and May due to the combination of the pandemic’s impact on energy demand and the price war between Saudi Arabia and Russia, which saw the kingdom flood the market with crude. Since then, inventories have been drawing down after U.S. President Donald Trump brokered a deal between Riyadh and Moscow to cut output from May.
The current oversupply is partly the fault of OPEC+, which began to taper its production cuts in August and added more than 1 million barrels a day into a weak market, Dunand said. The group is scheduled to meet Dec. 1 to decide whether to add a further 2 million barrels a day from January 2021.
“I don’t think the market can take that extra oil,” he said.
Dunand’s slightly bearish view, though not as extreme as Trafigura Group, the world’s second-largest independent oil trading house, is at odds with top trader Vitol Group, which expects global oil stockpiles to shrink rapidly by year-end.
Brent crude futures fell 0.8% to $41.42 a barrel as of 8:32 a.m. London time, taking this month’s decline to 8.6%. Prices have dropped in September as Covid-19 infections are accelerating in many parts of the world and clouding the demand outlook.
Even as consumption in China is recovering, it remains weak in the U.S. and Europe as governments strive to balance economic growth and keeping a lid on the virus. As a consequence demand is much lower than what the market was previously expecting to see by now, Dunand said.
“China is showing robust demand and Indian demand is starting to improve,” he said. “But elsewhere consumption is weak, and now countries are going back into lockdown.”
In May, the market consensus saw global oil consumption at 97 million to 98 million barrels a day in the fourth quarter. In reality, demand will perhaps be 95 million a day and inventory draws will be around 1 million a day on average, Dunand said. The pace of decline in stockpiles “will be much slower than previously anticipated.”
Continued weak refining margins underscore the flaccid demand picture. A major oversupply is making diesel the biggest problem area for oil, according to Dunand.
“Demand is poor and on the supply-side refiners are pushing jet fuel into the diesel pool. The result is that diesel inventories keep growing,” he said. “Diesel is the biggest problem in the oil market, by a long shot.”