Dozens of tankers with unsold crude have been amassing at sea in the past few weeks, vividly reminiscent of 2015 when a recovery in oil prices was scuppered by rising physical supply.
Oil futures have rallied some 75 percent so far this year, reaching a 2016 high above $47 a barrel, fuelled by the belief that nearly two years of excess has abated.
Investors have poured cash into the oil market at the fastest pace on record, according to exchange data, and hold a record amount of Brent crude futures.
But the physical market is flashing warning signs, setting up for a possible sell-off, much like what happened in spring last year.
“We…see worrying parallels to 2015, when oil prices rose sharply well into May before collapsing in the second half of the year,” Commerzbank analysts said in a note.
Even as the price rallied, U.S. crude inventories hit record highs, and cargoes of unsold oil linger in West Africa and the North Sea.
“At record stock levels, that is perhaps scary,” one trader said of the investor bets on oil.
Vessels holding 7 million barrels of Forties – one of the grades that determines the level of the global dated Brent benchmark – have built in the North Sea this month.
The volume equates to half of the entire Forties loading programme for next month, and Reuters shipping data shows no supertanker bookings yet to sail to Asia in April, an absence of a crucial arbitrage flow that has not happened since last August.
In Nigeria, just under 10 million barrels of oil yet to trade for May loading, out of a total close to 50 million barrels. While it is a small overhang compared with possibly twice as much last year, it is stark given that force majeure and other issues have removed roughly 300,000 barrels per day (bpd) from the market.
Additionally, Iran is gaining traction in its efforts to regain market share, pouring even more oil into the world.
The strength in prices of oil for prompt delivery relative to those for delivery further ahead has crushed any incentive to store physical barrels and sell them at a profit in the future.
“Globally, I think there should be less demand for crude oil for storage plays, and that was a big component of demand in the first quarter,” Olivier Jakob of PetroMatrix said.
“It’s not economic to put oil in storage,” he said, noting deals are limited to refineries that will process the crude.
Jakob also noted that prompt prices had not yet risen enough relative to future levels to lure some of the millions of barrels of stored oil back into the physical market. If that occurred, any such flood could quickly snuff out the rally.
The other problem is the speed at which Brent crude futures have appreciated in the last two months relative to other benchmarks, such as Dubai or US crude futures.
This means African, North Sea and other crudes priced off Brent compete less effectively for customers in Asia or the United States, where buyers had absorbed Nigerian crude earlier this year.
“The Brent structure has really firmed up,” Jakob said. “So in West Africa, they need to lower differentials.”
Idle cargoes could well be the growing pains of a market that is rebalancing, where barrels find homes more slowly, but are being processed into products, rather than squirreled away in tanks in the hopes of a rebound later.
“(Excess crude) seems to be reemerging, but at least it’s slowly finding its way to end users,” one trader said.