A billion-barrel oil glut is forming at sea

There are 1.4 billion barrels of oil “on the water." That is 24% higher than the average for this time of year between 2016 and 2024, according to oil-analytics firm Vortexa. The data measures shipments that are on their way to be unloaded at a port, or cargoes that haven’t yet found a buyer.

The rise of oil on water comes from multiple sources. There has been a 16% year-over-year jump in barrels from mainstream producers, Vortexa data shows. OPEC+ has been pumping more oil as it unwinds production cuts, and supply is also increasing from non-OPEC exporters like Brazil, Guyana and the U.S.

But there has also been a surge from sanctioned producers Russia, Iran and Venezuela. The number of “dark" barrels on the ocean has jumped 82% in a year, with a rapid rise in the past three months.

Geopolitics is driving the trend. India and China are usually the top customers for Russian oil but have been wary of making purchases since the White House sanctioned producers Lukoil and Rosneft in October.

The U.S. also recently sanctioned a Chinese oil terminal in Shandong province that had been accepting shipments of Iranian crude. The restrictions haven’t stopped Iran or Russia from pumping oil. But it is becoming harder to find buyers, so vessels are getting trapped at sea.

The “dark" barrels are a dilemma for the market. They are too big a share of global flows to ignore—15% of the world’s oil supply is now under sanctions, according to Kpler. But with the usual buyers on strike, there is an argument that these sanctioned barrels can be discounted from estimates of available supply.

When sanctions were put on Moscow in the past, oil did eventually make its way to buyers—although it took a few months for Russia’s sophisticated shadow fleet to set up new supply chains to skirt restrictions. On a visit to Delhi last week, Russian President Vladimir Putin said he is ready to provide “uninterrupted" shipments of fuel to India.

If he succeeds in delivering oil to India and China again—by setting up new, nonsanctioned entities to handle transactions or doing ship-to-ship transfers to hide the real origin of the oil—there will be less demand for replacement barrels from nonsanctioned producers, which could hurt the Brent price.

Uncertainty about what will happen next may explain why Brent has held relatively steady between $61 and $66 a barrel over the past two months, despite the swelling inventory at sea.

The other reason growing supply hasn’t dented the oil price is because China has been adding about 290,000 barrels of oil a day into storage this year, according to Rystad Energy. This has soaked up some excess crude. Global tensions are making the Chinese government nervous about disruptions to energy imports, so it is hoarding more oil as an insurance policy.

China’s stockpiles are treated as strategic reserves, which don’t move prices as much as commercial inventories. If that extra crude had shown up in major OECD pricing hubs that analysts track closely, the impact would have been dramatic.

Say half of the 97 million barrels of oil that Rystad Energy estimates China has socked away so far this year had shown up in storage facilities at Cushing, Okla., instead. That would bring Cushing’s storage levels to 70 million barrels—slightly above the level that contributed to turning West Texas Intermediate futures negative in April 2020. Back then, sellers holding front-month contracts had to pay buyers to take barrels off their hands as they were worried there would be nowhere to store the oil.

Sanctions are making it very difficult to judge where the market will head next. The result has been an unusually steady oil price despite growing oversupply. But any sign that the glut of sea oil is moving onshore could cause the floor to fall out from under the oil price.

Write to Carol Ryan at carol.ryan@wsj.com