Following the collapse of the oil price in 2014, there was significant building of oil inventories, with total OECD commercial oil stocks increasing by 12% in 2015 to reach 2.7bn bbls by the end of the year. Stock building was an important driver of tanker demand during 2015 and developments in inventories this year may well continue to have a significant impact on the tanker market.

Checking Inventory

Inventories represent an important part of the oil supply chain. Government-controlled stocks are generally relatively stable in many OECD countries, although elsewhere, countries such as China have recently built up their inventories. While commercial stock levels can fluctuate more widely, following the economic crash commercial oil stocks in the OECD remained relatively steady for a number of years at around 2.4bn bbls. However, the fall in the oil price in 2014, coupled with the contango in the oil futures price and market oversupply, has stimulated significant stock building across a number of regions.

Build, Build, Build

In OECD Europe commercial crude stocks rose by 50m bbls in 2015, equivalent to almost 25% of European seaborne crude import growth that year. Similarly, commercial crude stocks in the US also surged, to 500m bbls by the end of January 2016, a 19% y-o-y increase. Since then US stocks have grown further, to top 540m bbls at the end of April, a record high. However, Japanese crude stocks have not risen as firmly, partly due to weak domestic oil demand. Meanwhile, the filling of the Chinese Strategic Petroleum Reserve (SPR) has supported significant growth in Chinese seaborne crude imports. As of mid-2015, the Chinese SPR stood at 190.5m bbls, compared to 90m bbls in November 2014, representing an increase of 0.4m bpd (equivalent to 7% of Chinese seaborne imports during that period). Similarly, OECD commerical inventories of oil products rose 7% in 2015 to hit 1.5bn bbls by the end of the year, largely driven by inventory building in the US and Europe.

Stocking Suspended?

The rapid filling of stocks in a number of regions partly supported seaborne oil trade growth of 4.4% in 2015. What's more, the availability of storage space has decreased in some regions, creating logistical bottlenecks, such as in China and parts of Europe, leading to delays offloading, which has reduced effective vessel supply. If this situation becomes more acute floating storage, for logistical reasons, could become even more widespread, further absorbing vessel supply. Meanwhile, reports that storage tanks in some regions may now be near capacity could signal the end of rapid stock building or even that widespread inventory drawdowns may be on the horizon in the near future. This could slow the rate of oil trade growth, with the pace of stock building in 2016 unlikely to match that of 2015.

So, changes in oil stocks can have a notable influence on the oil tanker market, affecting trade growth as well as potentially absorbing effective vessel supply. In current oil market conditions, trends in inventories look likely to remain prevalent as a driver of tanker market developments.