A natural harbor to the northwest of Cape Town keeps a secret that oil tracking professionals are still trying to uncover. The secret is exactly how much oil is in storage at any given moment at the Saldanha Bay array of tanks that can hold up to 45 million barrels. The reason this remains largely a secret is that these tanks, unlike oil storage facilities elsewhere, are half underground, making it harder to collect enough satellite imaging data to venture an estimate. Oil traders, apparently, appreciate this rare privacy of stocks.
The Saldanha Bay storage hub is among the largest in the world and came into existence during the apartheid years when the South African government sought to ensure adequate oil supplies for the country amid UN sanctions. Then the apartheid regime broke down and oil traders were quick to tap the storage capacity.
Bloomberg’s Paul Burkhardt writes about two recent instances when commodity traders made some pretty good money by storing crude in Saldanha Bay when the oil market was in contango, and then selling it later when prices improved. The first instance was in 2009 when prices crashed following the financial market crisis, and the second was in 2015 when prices tanked thanks to the global inventory overhang brought about by the shale boom in the U.S. and OPEC’s then-strategy of drowning the market in oil.
Now, the Saldanha Bay storage hub is getting expanded, with another 13.2 million barrels in capacity to be added in 12 new tanks. Construction, by a joint venture between the world’s second-largest oil storage capacity builder, German Oiltanking, and South African MOGS, began last year.
The first phase of the expansion will add 8.8 million barrels to the facility’s capacity, to be completed in the second half of this year. By the end of 2019, the rest of the storage capacity plus blending facilities will be completed. The blending component of the project will further enhance Saldanha Bay’s significance for Africa and for international markets. After all, the bay sits close to the Cape of Good Hope, a major oil transit route between Asia, Europe, and the Americas.
In 2016, some 5.8 million barrels of crude daily passed around the Cape of Good Hope. This compares with 5.5 million bpd going through the Suez Canal and 4.8 million bpd through the Bab el-Mandeb pass between the Arab Peninsula and North Africa. The route is preferred by some oil shippers because, in spite of being longer than the route through the Suez Canal, it is less expensive: most costs have to do with bunkering and crew wages. It is also safer than Bab el-Mandeb—a major chokepoint in an area with pirate activity, not to mention the war in Yemen.
There is also the issue of weight. The Suez Canal cannot handle very large crude carriers, unlike the Cape of Good Hope. Now, with the expansion of the Saldanha Bay storage hub, we will likely see even more commodity trader interest in storing crude oil there rather than somewhere else. Oil prices are falling again, and although the market is still in backwardation, with all the excessive volatility it’s anyone’s guess when it will swing into a contango, motivating traders to start building stockpiles in South Africa.
By Irina Slav for Oilprice.com