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Page added on March 24, 2015
Sorry, but there was never an oil storage crisis
Crude oil storage inventories in the US are at their highest levels in decades. Is that going to cause the price of West Texas Intermediate crude to crash?
Probably not, according to Robert Rapier of Energy Trends Insider.
In fact, we’re not even close.
Rapier writes that “oil producers could continue to add a million barrels a week (which is about the average over the past year) for nearly four years before crude oil storage is actually full.”
The best-known storage facility, in Cushing, Oklahoma, would run out of space much sooner than that at the current rate (about four months from now). But that still isn’t going to happen, according to Rapier:
We are currently in the season when refinery utilization is lowest. Refiners take equipment offline in fall and spring to do maintenance, so they use less crude oil at this time of year. This maintenance usually peaks in March, and then crude oil demand picks back up as refiners gear up for the summer driving season. The difference in refinery demand between this time of year and summer is generally around a million barrels per day, so even if nothing else changes that storage build should start to flatten.
In other words, we may have already hit peak crude storage here in the US, and if not, we’re getting very close.
Over at Reuters, John Kemp writes that the market doesn’t actually seem very worried about storage capacity.
If the market was concerned about space at Cushing and onshore more generally, the contango would have widened even further as stocks rose to make it profitable to use more expensive offshore storage.
However the term structure of futures prices has remained essentially unchanged for the past two months — implying traders are not particularly concerned about storage issues and do not foresee the need for more expensive options like floating storage.
2 Comments on "Sorry, but there was never an oil storage crisis"
rockman on Tue, 24th Mar 2015 5:05 pm
At the risk of being redundant with another post here’s a little more meat on the subject:
The EIA released its weekly petroleum status report Wednesday morning. U.S. commercial crude inventories increased by 4.5 million barrels last week. Wow…so in a week when the US consumed about 110 million bbls of oil we gobbled down 96% of the oil available from domestic production and imports. So this is now the definition of a glut: only consuming 96% of the oil available.
And remember even while zerohedge is hyping the “OMG we’re running out of storage” in the same article they show that there is always an historic build up in storage at this time of year followed by a drawdown over the summer months. Granted we’ve seen higher then average volumes going to storage this year. But we’re also seeing motor fuel consumption ramping up quickly thanks to lower prices. So who’s going to be shocked if we see higher than normal drawdowns in the next 6 months?
The Cushing gets mentioned a lot because those prices there that are used to determine winners and losers in the oil futures market. The country stores 84% of its physical oil somewhere else other then at Cushing. If Cushing gets filled up that would still leave over 150 million bbls of empty storage nationwide. And if 5 million bbls continues going to storage weekly total capacity wouldn’t be filled for another 7 months.
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/03/20150319_oil2
And as their chart shows there’s a very good reason the expect inventories to start being drawn down over the next 6 months. that happened last year. And the year before. And etc. etc. etc.
And lastly lets not forget where domestic oil production is heading. Oil production from the shales in 2015 will not be the same as during 2014…far from it. If the current rig count stops decreasing and holds at the current level (not likely IMHO) for the rest of the year there will be more than 4,000 shale wells NOT DRILLED compared to 2014. That’s a big chunk of the shale wells drilling last year which led to record production levels. And lets not forget the fate of all those 2014 wells that boosted production: the Jan 2014 wells are now 1 year old. Which means they’ve already seen their high decline rates kick in. And the Dec 2014 wells? They’ll be seeing the same significant loss of production by the end of 2015. Now add that loss of production from 2014 wells during the course of 2015 with the loss of 4,000+ new wells that WON’T BE DRILLED as a result of the falling rig count.
Just my hunch but I suspect by 3Q and 4Q 2015 the topic of oil storage may be more focused on losses instead of gains
Perk Earl on Tue, 24th Mar 2015 11:31 pm
Well, it won’t take long to find out the tale of tape so to speak.