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Page added on August 1, 2015
Oil storage becomes big business
Commercial crude stocks across the United States rose by 105 million barrels early this year to peak at 490 million barrels, the highest level in eight decades.
Despite some draw downs in recent weeks, which have reduced inventories to 460 million barrels, stocks are still 92 million barrels higher than this time last year.
And stocks could rise again at the end of the third quarter when U.S. refineries enter the traditional autumn turn around season.
Yet the cost of storing crude has remained relatively modest throughout thanks to a big increase in tank farm and pipeline capacity added in recent years.
Working storage capacity at refineries, tank farms and underground storage facilities in the United States has increased by 85 million barrels, almost 19 percent, since 2011.
More than 45 million barrels of extra working capacity has been added in just the last two years, according to the U.S. Energy Information Administration (EIA).
Over half the extra working storage capacity was in states along the U.S. Gulf Coast, with most of the rest added in the Midwest.
In the same period, the amount of crude needed to fill pipelines and in transit by barge, tanker and rail has also jumped by 17 million barrels, as new oil pipelines and oil trains were added.
Crude stocks at the end of March were 82 million barrels higher than in March 2013, according to the EIA (“Working and net available shell storage capacity” May 2015).
But with an extra 17 million barrels of oil in line fill and transit, and 46 million barrels of extra working capacity, the storage utilization rate rose comparatively modestly from 56 percent to 63 percent.
The availability of so much storage helps explain why the contango in U.S. crude futures has mostly been well below $1 per barrel per month since the start of the year (link.reuters.com/nan35w).
Predictions that storage capacity would run out, which briefly pushed the contango beyond $1 per barrel per month in February and March, proved wide of the mark.
And there has been only relatively modest demand for the more expensive option of storing oil on tankers moored off the coast.
STORAGE MODEL
Storage is big business and very profitable under the right conditions. It has attracted significant interest from trading companies and third-party logistics suppliers (3PLs).
Nearly all the extra working storage capacity in the United States has been added at tank farms and underground facilities rather than refineries.
Many of the tanks are owned directly by traders or are available for hire.
Much of the storage is designed to facilitate speculative plays and to take advantage of temporary market imbalances rather than meet immediate operational needs of the refining system for short-term supply security and blending.
Pure storage companies make money from leasing capacity. Merchants exploit the difference between the cost of storing and financing oil implied by the contango and the actual cost of borrowing funds and leasing tank space. Many companies now do both.
Once facilities are constructed, there is an incentive to fill them, if and when it can be done profitably, to earn a return on the investment, which is why so much of the global stock build in the first quarter of 2015 turned up in the United States.
Construction of storage capacity tends to increase the amount of stock the market wants to carry by reducing the cost of stockpiling.
Other major merchant storage facilities are available at Rotterdam, Saldanha Bay in South Africa, the Bahamas and Singapore, among other centers, and many are adding even more capacity.
The merchanting and storage business model tends to draw surplus oil preferentially towards U.S. tank farms and the other storage hubs.
At the same time, the United States is the only country to publish official weekly and monthly data on stocks in close to real time.
There is a natural tendency to draw conclusions about the state of the global supply-demand balance on the basis of short-term changes in U.S. commercial stockpiles.
But the U.S. storage model is not representative of stocks globally, so conclusions about the global supply-demand must be drawn carefully, both when stocks are rising and when they are falling.
The oversupply in oil markets during the first half of 2015 was real, but the profitability of storage plays probably exaggerated the change in the overall stock situation in the short term.
If the contango remains favorable – and it’s currently running at 50 cents per barrel per month between September and December – more crude will be imported and stockpiled in the United States this autumn to fill the tank farms again.
19 Comments on "Oil storage becomes big business"
penury on Sat, 1st Aug 2015 2:02 pm
The yo-yo goes up, the yo=yo goes down. The good thing is that it allows everyone with an opinion a chance to comment.
Mike989 on Sat, 1st Aug 2015 9:15 pm
Economic Darwinism.
Keep storing it, my next car will be a Plug In Hybrid.
I won’t be burning 90% of what I burn today, in just 2 years.
In other words, gas is dead in the near term.
Plantagenet on Sun, 2nd Aug 2015 12:36 am
When you’ve in an oil glut like the world is in now, you’ve got to store the extra oil production somewhere.
Davy on Sun, 2nd Aug 2015 7:23 am
Planter, in a normal economy demand would be lapping up all that production. Too bad we are suffering from stagnating growth from demand destruction. The glut is just a societal feel good talking point for folks like you enamored by feel good words and messages. Notice how the talking heads on the mindless news channels are always mentioning an oil glut. Planter did you enjoy fairytales when you were a kid? I bet you still love a good movie with a happy ending. Life is good for a corn even if it isn’t.
shortonoil on Sun, 2nd Aug 2015 7:34 am
0.0003% of all the oil that has ever been produced is now in storage. It is an amount which is less than 20% of what is required to fill up the world’s pipe lines. It is equal to about 5 days of world consumption. That is being accredited for dropping the price by more than 50%. If true the world’s demand curve for petroleum is now a straight vertical up and down line. Every ship wreck, every pipeline breach, every revolution in an oil producing country is going to drive the price through massive swings. If true the price of oil has become so volatile that the industry will no longer be able to function. Has the world of oil gone crazy?
We think there is another explanation:
http://www.thehillsgroup.org/depletion2_022.htm
Boat on Sun, 2nd Aug 2015 8:04 am
If true the world’s demand curve for petroleum is now a straight vertical up and down line. Every ship wreck, every pipeline breach, every revolution in an oil producing country is going to drive the price through massive swings. If true the price of oil has become so volatile that the industry will no longer be able to function.
More weird wording and spin. Short you should go into politics.
It is expensive to store oil. But he more you have the more you can play the pricing game and also keep customers happy for spikes in short term demand. This is the way it has always been. Nothing new.
Davy on Sun, 2nd Aug 2015 8:22 am
Boat, I used to store corn to play the pricing game. Not as impressive as you may think. Storage has a cost that can bring a negative or lower return if one is not careful. It is a game of chance like other casino games.
You would be smart to acknowledge Short’s message. Your dismissal makes you look either less smart or promoting an agenda. I agree the thermodynamics of oil can be argued and discounted per economic realities but not dismissed as the corns always want to do. It is the constant dismissal that makes me believe the corns are worried about the realities of depletion.
Boat on Sun, 2nd Aug 2015 8:49 am
What part of Shorts message do you think I am missing.
Davy on Sun, 2nd Aug 2015 8:58 am
Boat, give me your Short critique so I can put that in my corn porn collection.
Boat on Sun, 2nd Aug 2015 9:41 am
Davy,
0.0003% of all the oil that has ever been produced is now in storage. It is an amount which is less than 20% of what is required to fill up the world’s pipe lines. It is equal to about 5 days of world consumption.
That was in shorts comment that you said I should not dismiss.
That is being accredited for dropping the price by more than 50%.
I dismiss that idea entirely. Storage capacity caused the price of oil to drop 50%?
I think you are so used to holding each others hand that you don’t even read each others comments.
If Short was right, then what role does storage play when oil is up 50%. Davy your smarter than that.
Davy on Sun, 2nd Aug 2015 9:51 am
Boat, go to short’s web site then get back to me after you fully read his message. Comments are another animal used in a variety of ways. Let’s go back to the basics to see who is smart and who isn’t. I can tell you right now I am not that smart but I know this. Others claim to be smart by just ain’t. What’s in your wallet Boat?
Boat on Sun, 2nd Aug 2015 10:13 am
Davy,
The idea that storage caused oil to drop 50% is just plain ridiculous. Spo instead of commenting on that little gem of disinformation/spin. Now you want me to comment on the rest.
I had read shorts full message. I just chose the dumber part of the message to comment on.
Don’t twist my words. I didn’t call anyone dumb. I am much more moderate than. I will call out spin and disinformation as needed. Lol
Davy when you say, Comments are another animal used in a variety of ways.
Is that like saying blatant lying is ok as long as it suits you and your agenda?
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Davy on Wed, 17th Jun 2020 5:04 am
I will contacting you soon. Do you accept collect calls?
Davy on Wed, 17th Jun 2020 5:36 am
“JuanP on Wed, 17th Jun 2020 5:04 am
I will contacting you soon. Do you accept collect calls?”
juanPee, There was a derogatory post on the moderated side to what you are doing so check it out. I also gave a long REAL Green comment that you should read.
https://peakoil.com/forums/viewtopic.php?p=1452065#p1452065
“Re: Global Warming / Climate Changes Pt. 22 by dohboi » Tue 16 Jun 2020, 11:56:12”
“Good points, RG…Keep the science, coming, RG, and ignore any trolls that try to silence you!”
also
Re: Global Warming / Climate Changes Pt. 22
by REAL Green » Wed 17 Jun 2020, 05:28:53
REALLY Green Hypocrite on Wed, 17th Jun 2020 5:57 am
Dear Davy,
I’m having to come down hard on you due to your buffoonery reaching new levels of absurdity. Like any sane person gives a flying fuck what we have to say. Can you say, who cares?
We are quite the mess, eh?
More Lunatic Davy (AKA The Pink Poodle) JuanP Derangement on Wed, 17th Jun 2020 7:43 am
Davy on Wed, 17th Jun 2020 5:36 am