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Page added on February 26, 2016
This Is The ‘Big New Threat’ To Oil Prices
One week ago, we reported that even as traders were focusing on the daily headline barrage out of OPEC members discussing whether or not they would cut production (they won’t) or merely freeze it (at fresh record levels as Russia reported earlier today) a bigger threat in the near-term will be whether the relentless supply of excess oil will force Cushing, and PADD 2 in general, inventory to reach operational capacity.
As Genscape added in a recent presentation, when looking specifically at Cushing, the storage facility is virtually operationally full (at 80%) with just 4-5 more months at current inventory build left until the choke point is breached, and as we have reported previously, storage requests for specific grades have already been denied.
Goldman summarizes the dire near-term options before the industry as follows:
The large builds in gasoline and crude stocks have brought PADD 2 storage utilization near record high levels. While the recent decline in Midcontinent refining margins should help avoid breaching storage capacity, by finally bringing gasoline back into deficit, this will likely only exacerbate the build in crude inventories in coming months and should require further weakness in PADD2 crude prices to spread this build to the USGC. Weaker gasoline demand/exports, or higher margins/runs or finally resilient crude imports/production, could create binding storage issues beyond the intermittent Cushing WTI cash price weakness observed so far, which would require another large leg lower in crude prices to shut production in the Midcontinent and Canada. As we have argued, this continued testing of storage constraints should keep price and margin volatility elevated.
However, while the threat from overproduction on soaring crude inventories, or in other words “supply”, has been extensively documented, far less has been said about another just as big problem: “demand”, or the potential supply-chain bottleneck that will hit the moment refiners finds themselves flooded with too much unwanted product, in turn telling producers they have to turn oil back simply because they have no more capacity.
Is this possible? It’s already happening.
As the WSJ reports in a piece titled “The Big New Threat to Oil Prices: A Glut of Gasoline“, refineries in the U.S. Midwest are losing their thirst for oil, posing a new risk for the battered crude market. The Midwest accounts for nearly a quarter of the crude processed in the U.S. and is home to shale producers that have few other outlets for their oil. But refiners there are already swimming in gasoline and other fuel, forcing them to cut back production until the excess can be worked off.
In other words, not enough intermediate demand in the supply-chain with the result the same as oversupply: more crude oil is available in the market, worsening a glut that has been undermining oil prices for the past year and a half. As the WSJ adds, “with U.S. crude inventories at the highest level in more than 80 years, some storage hubs have little room left to store oil.”
This means that storage hubs are now being hit on both sides: from excess production in a global market oversupplied by 3 million barrels daily, and from collapsing demand by the refiners for whom operating at current prices has become uneconomical. The result is that refinery production capacity, while already running at record levels for this time of the year, has tumbled from 98.2% a month ago to just 92.9% last week.
This drop is significant because, as the WSJ explains, it marks the first time several refineries in the region have opted to reduce activity for economic reasons— a marked change after more than a year of refiners processing as much crude as possible.
Here is the problem illustrated: gasoline stocks are literally off the charts in terms of the past 10 year min-max range:
… as refineries operate at a record pace for this time of the year…
… while gasoline demand is well within its past decade range:
Which means refining production has no choice but to decline, which is precisely what it is doing. Three examples:
- CVR Refining LP is among the companies that have scaled back. The company said recently that it reduced runs at its 70,000-barrels-a-day refinery in Wynnewood, Okla., by as much as 10,000 barrels a day. “It doesn’t make sense to process something when you’re not making anything on it,” Chief Executive Jack Lipinski said during a Feb. 18 earnings call.
- HollyFrontier Corp. said Wednesday that it has trimmed production at refineries in Kansas and New Mexico due to lower margins.
- PBF Energy Inc. Chief Executive Tom Nimbley said during a conference call on Feb. 11 that the industry “turned the dials to make more gasoline” in the last quarter of 2015 and overshot demand. “The gasoline is not going to the consumer,” he said. “It’s going into a tank.”
The first immediate consequence of overproduction are dropping margins as refiners try to sell their product into a glutted market, and sure enough refining margins are lower throughout the country this year, including in the Gulf Coast region, where more than 50% the country’s refining capacity is concentrated. But refiners there have more choices when it comes to buying crude oil and can substitute cheaper options if they become available. And they can put fuel on tankers to sell overseas if supplies build up too much.
In other areas, there are fewer viable options: recent cutbacks have been enough to nudge gasoline prices higher in the Midwest, though it’s still cheap in some places: Gas was selling for as low as $1.11 a gallon on Wednesday in Granite Falls, Minn., according to Gasbuddy.com. Gasoline futures for March delivery rose 4.6% on Wednesday to $1.0104 a gallon, up from a seven-year low hit earlier this month.
Which again brings us to the most important commercial hub in the US, located in the heart of the Midwest in Cushing, Oklahoma.
“Many industry players and analysts think refiners will ramp up production after spring maintenance and they expect activity to pick up in the summer as cheap gasoline spurs Americans to take more road trips. But for producers in the Midwest and Canada, any decline in Midwest refining activity is worrisome. The region is home to the crucial oil storage hub at Cushing, Okla.—the delivery point for the U.S. oil futures contract.”
Sellers in the futures market can either deliver physical crude or buy futures to offset their obligations. A lack of storage space can force buyers out of the market and supplies in Cushing are at their highest level ever. Analysts warn U.S. oil futures could fall further as Cushing nears full capacity.
This is precisely what we have been warning about for months, or as Paul Horsnell, global head of commodities research at Standard Chartered puts it, “There’s a feeling of various bits of ice cracking all at once” in the oil market, with both crude-oil and gasoline inventories at extremely high levels… People are worried about a short-term issue, particularly in the U.S., particularly at Cushing.”
The good news is that we are likely very close to the worst case scenario playing out: refiners are unlikely to start buying more crude in the coming weeks. Instead, many will begin seasonal maintenance ahead of the busy summer-driving season. That could leave some oil producers scrambling to find places to store their output. Prices in some regions might have to drop sharply to justify the cost of shipping the oil to where it can be stored.
Which means there are just two options: find some undiscovered storage, or hope demand picks up.
On the first, there is always hope: “we’ll just look for every other nook and cranny throughout North America to stuff crude oil into,” said Andy Lipow, president of consulting firm Lipow Oil Associates in Houston. “The market is just not going to like it.”
However, it is the second that is the biggest wildcard: refiners profit on the difference between oil prices and fuel prices. Oil prices have dropped 70% since mid-2014 to around $32 a barrel currently, but robust demand for gasoline kept prices at the pump from falling as quickly last year, boosting refiner margins. However, analysts question whether demand will increase strongly this year, especially given broader concerns about sluggish economic growth.
Which brings us to the punchline: on a four-week average basis, U.S. gasoline demand fell in January compared with the year before, according to Energy Information Administration estimates.
This despite the alleged increase in US consumer purchasing power or the so-called “tax-savings” from low gasoline prices, which should have boosted overall gasoline demand.
It has not.
Which is why with the market having debated the supply issue for over a year, and overanalyzed the OPEC and non-OPEC supply question to death, what virtually nobody has discussed is the just as important demand side of the equation, perhaps because nobody dares to admit the obvious: the much needed rebound in demand is just not there.
If that is indeed the case, expect a sharp, violent move lower in the price of oil in the coming weeks as the fundamental oil reality finally catches up with the imaginary world of stop-hunting, momentum-igniting, algorithmic daytraders.
22 Comments on "This Is The ‘Big New Threat’ To Oil Prices"
Truth Has A Liberal Bias on Fri, 26th Feb 2016 8:30 pm
Cushings is full yet USA continues to import. In fact it seems that the volumes imported in January exceeded the volumes imported in December.
Plantagenet on Fri, 26th Feb 2016 8:45 pm
Oil storage facilities are filling up in the US and around the world due to the oil glut. Its gotten so bad in the ME that producers are starting to give their oil away for free.
http://oilprice.com/Energy/Crude-Oil/UAE-Offers-India-Free-Oil-To-Ease-Storage-Woes.html
Cheers!
Truth Has A Liberal Bias on Fri, 26th Feb 2016 11:30 pm
Plant is retarded as usual. UAE is paying for storage with oil instead of cash. Not giving it away for free. Hey plant if I can store 10000 pounds of beef in your walk in freezer for a year I’ll give you 100 pounds for free. Fucking retard.
adonis on Fri, 26th Feb 2016 11:57 pm
if it costs the usa more money to use their oil then logically they will import because that oil is cheaper and all the rich oil is going into storage waiting for when prices permanently go up, which will never happen because of limits to growth. yes there is an oil glut and its gonna get bigger until the financial system implodes. from their own the only oil available will be that stored oil . yamos(cheers in greek)
marmico on Sat, 27th Feb 2016 5:23 am
Vehicle miles travelled is doing what would be expected with the decline in gasoline prices. They are rising, 4.2% year over year.
http://www.advisorperspectives.com/dshort/updates/DOT-Miles-Traveled.php
What the zeroretardanalyst doesn’t contemplate is that newer model year vehicles with higher mile per gallon fuel efficiency (mpg) turns the tire rubber more than older vehicles with lower mpg.
http://www.umich.edu/~umtriswt/EDI_sales-weighted-CAFE.html
Hence, the disconnect with “tax-savings from low gasoline prices, which should have boosted overall gasoline demand”.
rockman on Sat, 27th Feb 2016 7:56 am
And to add to some of the good points made: Cushing contains only 20% of total US oil storage capacity. Notice they don’t mention the fill level of that total: last time I looked it was about 65%. That means 35% of the 450+ MILLION BBL CAPACITY is still empty.
And why are we still importing oil: lack of sufficient domestic AVAILABILITY…not production. The vast majority of oil going into Cushing IS NOT do to a lack of buyers as the import numbers indicate. It’s largely do to speculators hoping to take advantage of f increases in future oil prices. The net effect is that these speculation OIL BUYERS are competing with the refiners for domestic production. Which, again, explains why we still import a huge volume of oil despite the constant and foolish use of the word “glut”. IOW if we are still importing oil how can there be a glut of domestic oil: the US lacks sufficient oil production to satisfy the demand from the refineries AND speculators.
rockman on Sat, 27th Feb 2016 9:39 am
A few more FACTS to offset the “OMG Cushing is filling up” hysteria. First, Cushing is in PADD 2 as they point out. But it isn’t the only tank farm in that midwest district: it only holds 60% of that total capacity.
And now compare the 88 mm bbl capacity to the PADD 3 (essentially Texas and LA. where the bulk of the refineries are) capacity of 260 mm bbls. Between the speculator purchases and the smaller number of refineries combined with the large volume of Canadian imports seeing Cushing filling up is no surprise.
And we’re just talking about tank farm storage. So again compare the 88 mm bbl capacity at Cushing to the total storage capacity at US refineries: 179 mm bbls. No: the volume of oil held at refineries is not part of the total TANK FARM capacity. So how much is the Cushing storage capacity compared to tank farms + refinery storage: 13%.
OMG: almost 13% of the capacity of storing oil in the US is getting close to being full…what are we going to do???
Maybe they’ll just build more storage: since 2011 about 25 million bbl of new storage was added to Cushing and 57 mm bbls added in the Gulf Coast. IOW Cushing would have been completely filled years ago had not SPECULATING INVESTORS not paid for new storage.
rockman on Sat, 27th Feb 2016 9:39 am
A few more FACTS to offset the “OMG Cushing is filling up” hysteria. First, Cushing is in PADD 2 as they point out. But it isn’t the only tank farm in that midwest district: it only holds 60% of that total capacity.
And now compare the 88 mm bbl capacity to the PADD 3 (essentially Texas and LA. where the bulk of the refineries are) capacity of 260 mm bbls. Between the speculator purchases and the smaller number of refineries combined with the large volume of Canadian imports seeing Cushing filling up is no surprise.
And we’re just talking about tank farm storage. So again compare the 88 mm bbl capacity at Cushing to the total storage capacity at US refineries: 179 mm bbls. No: the volume of oil held at refineries is not part of the total TANK FARM capacity. So how much is the Cushing storage capacity compared to tank farms + refinery storage: 13%.
OMG: almost 13% of the capacity of storing oil in the US is getting close to being full…what are we going to do???
Maybe they’ll just build more storage: since 2011 about 25 million bbl of new storage was added to Cushing and 57 mm bbls added in the Gulf Coast. IOW Cushing would have been completely filled years ago had not SPECULATING INVESTORS not paid for new storage.
Nony on Sat, 27th Feb 2016 12:41 pm
Agreed, the Cushing stuff is overplayed. It’s the tail, not the dog anyways.
Oil us up several dollars over the last couple weeks (26 to 33). And the contango has shrunk (prompt/spot up more than 1 year out). Both of these are factors that argue we are not in a storage crisis, that the glut is easing.
Note: 33 is still WAY less than 100. And the long term strip has dropped significantly also So we have had a radical change in the market since JUL2014. But current indications (even just the contango itself) argue that future oil prices will be higher than current, rather than lower.
Of course there is a probability spread of outcomes and the US EIA STEO price funnel diagram shows that prices could be higher or lower over next few years. So future price drops are still reasonably possible (above 5% likelihood), although not likely (below 50% chance).
shortonoil on Sat, 27th Feb 2016 1:14 pm
Cushing is vital because it supplies a large part of the Gulf refining industry. Its storage capacity is critical because when its capacity falls low enough it will no longer be able to perform the blending needed to supply specific operations. With inventories having grown continuously for almost two years the market has a very valid reason to be concerned. It is only one more nail in the coffin of a dying industry.
http://www.thehillsgroup.org/
farmlad on Sat, 27th Feb 2016 2:02 pm
From all evidences Cushing is flooded with light oils and condensate, waiting for more heavy oils to be blended with, or more orders from the plastics manufacturers.
Apneaman on Sat, 27th Feb 2016 4:02 pm
Short sellers hitting energy at near-crisis levels
http://www.cnbc.com/2016/02/26/short-sellers-hitting-energy-at-near-crisis-levels.html
Apneaman on Sat, 27th Feb 2016 4:03 pm
Halliburton to Cut Another 5,000 Jobs Amid Oil Slump
http://abcnews.go.com/Business/wireStory/halliburton-cut-5000-jobs-amid-oil-slump-37199308
Apneaman on Sat, 27th Feb 2016 4:05 pm
Apache slashes 2016 budget by more than half, sees lower output
http://uk.reuters.com/article/us-apache-results-idUKKCN0VY1QO
penury on Sat, 27th Feb 2016 4:10 pm
Like most people I enjoy discussing the symptoms and declaring which one will be the first to kill the patient. However, I also like to look at the disease and see what I am missing. The disease is debt. NO the disease is overpopulation, which has led to over consumption of resources etc etc. One of the symptoms is of course debt etc etc. So is too much oil a symptom? Or would you prefer a shortage as a symptom? Perhaps the disease will kill us and not just blame the symptoms.
shortonoil on Sat, 27th Feb 2016 4:16 pm
“From all evidences Cushing is flooded with light oils and condensate,”
That is probably true because very light crude is only minimally useful to the refineries:
http://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/energy/images/eneene/sources/petpet/images/refraf1-lrgr-eng.png
It produces almost none of the more profitable end products, like diesel. It also only has a minimal impact on the economy because its energy content is much lower.
http://www.thehillsgroup.org/depletion2_011.htm
Its lower energy content also impacts crude prices. The price of oil depends on the strength of the economy, and the strength of the economy depends on oil’s ability to power it. Lower energy content oil does less powering, which results in less demand.
Apneaman on Sat, 27th Feb 2016 4:26 pm
Transocean sees trouble ahead
Rig company had 11 contracts canceled since last year.
http://www.upi.com/Business_News/Energy-Industry/2016/02/25/Transocean-sees-trouble-ahead/2611456409388/
IFuckYouOver on Sat, 27th Feb 2016 4:59 pm
Short of a chemical analysis of what is in there, we cannot interpret these data properly
The specific gravity of a fuel oil is a reflection of its heating value. The heating value is determined
primarily by the carbon/hydrogen ratio; as the carbon/hydrogen ratio increases, the specific gravity
will increase and the heating value will decrease. Section 3, Figure 3 will give some idea of the effect
of the carbon/hydrogen ratio and the various hydrocarbon components on the heating value. The
heating value is also decreased by the presence of sulfur.
The heat contained in a fuel, or its heating value (BTU/lb), is primarily affected by changes in a
specific (or API) gravity and its sulfur content in percent by weight. As the gravity of the oil
increases, the ratio of carbon to hydrogen increases, as well as the sulfur content. The result is that
there is less hydrogen with its high heating value available per pound, and a consequent decrease in
heat released during combustion. From a performance viewpoint, this change in heat content is indicated by an increased brake specific fuel rate in pounds per brake horsepower-hour and, to a very
slight degree, by a decrease in overall engine efficiency, as more fuel with a lower heat content must
be burned for a fixed power output.
Taken for this source below.
https://www.eagle.org/eagleExternalPortalWEB/ShowProperty/BEA%20Repository/Rules&Guides/Current/31_HeavyFuelOil/Pub31_HeavyFuelOil
rockman on Sat, 27th Feb 2016 6:04 pm
Cushing (PADD 2) “critical” to blending for the Gulf Coast (PADD 3) refineries? Useful perhaps but I wouldn’t say critical. As pointed out above Cushing has a tank farm capacity of 88 mm bbls while PADD 3 has a 260 mm bbl tank farm capacity PLUS the 170 mm bbl capacity of the GC refineries themselves.
Additionally refineries are becoming increasingly disappointed with the Cushing blends (which includes a lot of Canadian crappy dilbit) and are buying more oil directly from producers to construct their own blends. And given the total oil storage capacity of 430 mm bbls in PADD 3 (which contains much more refinery output then PADD 2) there’s a lot of space for blending then in Cushing’s 88 mm bbl tank farm.
And let’s not forget that while Canada exported 3.6 mm bopd to the US last Nov we imported almost twice as much from other countries. And the great majority of that oil is delivered to the Gulf Coast. And none of that oil is piped to Cushing. Which also explains why the Gulf Coast has almost 5X as much storage capacity.
Instead of “follow the money” the key phrase is “follow the oil”. LOL
shortonoil on Sat, 27th Feb 2016 6:19 pm
“Transocean sees trouble ahead
Rig company had 11 contracts canceled since last year.”
http://www.upi.com/Business_News/Energy-Industry/2016/02/25/Transocean-sees-trouble-ahead/2611456409388/
We will undoubtedly see a continuation of this trend over the next few years. The energy delivered to the general economy from a unit (lb, gallon, barrel) of oil has declined by 44% over the last 30 years. It will continue to decline with time as oil is continuously consumed. The price of oil depends on the strength of the economy, and the strength of the economy depends on oil’s ability to power it. Less energy delivered powers less economy, which results in a lower price for oil. High energy projects like deep water drilling can be expected to be the first to succumb. This effect will gradually work its way down the economic chain, with high energy activities being canceled first, and lower energy activities later. This will lead to the eventual termination of the modern economy. Understanding this will be extremely important for the individual’s future security.
http://www.thehillsgroup.org/
geopressure on Sun, 28th Feb 2016 10:08 am
This is total BS… U S Crude Storage Facilities are EMPTY… The EIA is full of shit…
FairChase on Thu, 3rd Nov 2016 11:43 am
Am I the only one who calls bullshit on these EIA reports…a few months ago the price of oil was dropping to near $40 and the EIA reported a “record drop of around 14 million barrels”….”the most in 20 years”….now suddenly since oil got up over $50 for a few weeks…all this bad news is hitting the markets and the EIA just reported a 14 million barrel increase…”the most in 20 years”…..hmmm…..bullshit???….market manipulation???