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Page added on February 26, 2015

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Are oil producers running out of closet space?

Oil supply running ahead of demand hasn’t just pressured prices, it’s also filling up storage space, potentially pushing crude toward another leg down.

“We’re going to see pretty fast inventory builds over the next few weeks,” Francisco Blanch, head of commodity research at Bank of America-Merrill Lynch, told CNBC Wednesday, noting that global supply is running around 1.4 million barrels a day above demand.

“If you run out of space, prices tend to react a lot more violently to adjust that supply and demand imbalance and that’s what we expect over the next few weeks,” he said, forecasting both WTI and Brent will fall toward $30 a barrel. Prices settled at $50.99 and $61.97, respectively, on Wednesday.

He cited fresh American Petroleum Institute (API) data which showed U.S. crude inventories climbed by a larger-than-expected 8.9 million barrels in the week ended Feb. 20, for a total of around 437 million barrels squirreled away. Around 50 million to 100 million barrels of crude oil may be gathering dust in floating storage by the end of the second quarter, compared with around 110 million barrels in April 2009, during the global financial crisis, he estimated.

The supply build isn’t helped by an oil market that’s in contango, or when the “spot” price is lower than the price of the future contract. That makes it more profitable for traders to stick their oil in storage to sell at a higher price later.

As much as 80 percent of the commercially available storage in the U.S. may already be utilized, Premasish Das, downstream analyst at IHS Energy Insight, told CNBC last week.

Oil tanks and pump jacks are seen in an oil field near Bakersfield, Calif., on a foggy day, Jan. 17, 2015.

Lucy Nicholson | Reuters
Oil tanks and pump jacks are seen in an oil field near Bakersfield, Calif., on a foggy day, Jan. 17, 2015.

“As the oversupply increases again in the second quarter, the contango structure will widen. This will further incentivize crude storage,” Das said.

Others are also concerned about how quickly space could run out. “Within around two months, [onshore storage will] be completely exhausted,” Ivan Szapakowski, a commodity strategist at Citigroup, told CNBC last week. “The only remaining storage globally will then be floating storage, tankers.”

Citigroup is forecasting oil prices to fall toward $20 a barrel before recovering.

Oil is already getting stashed offshore. Tanker prices and lease rates have doubled over the past 18 months, Gaurav Sodhi, a resources analyst at Intelligent Investor, told CNBC last week.

“Clearly, someone is going out there and leasing a lot of offshore storage and those lease rates are much higher. That suggests to me that there’s a massive supply of oil sitting on the ocean,” Sodhi said, noting each tanker can hold around 1 million to 2 million barrels each. “That sort of storage is going to take a while to unwind.”

Stashing oil offshore can also create other headaches. It’s harder to move the oil to where the buyer may want it and there can be issues with pollution, potentially making it more costly, IHS’ Das noted.

 

But despite the difficulties, the oil hoard may only grow in the near term. Das noted that Asia is heading toward its refinery maintenance shutdown period in the second quarter.

Additionally, a strike among refinery workers in the U.S. is now into its fourth week, affecting plants responsible for around 20 percent of the country’s production. Media reports said no talks between unions and management are scheduled for this week. If demand from the affected refineries declines further, it could be more bad news for inventory growth and prices.

CNBC



15 Comments on "Are oil producers running out of closet space?"

  1. Plantagenet on Thu, 26th Feb 2015 8:38 am 

    The oil is getting worse. Look for the price of oil to fall further.

  2. Ralph on Thu, 26th Feb 2015 9:50 am 

    This morning the Brent WTI spread hit $11.50 .

    The glut of US condensate is getting worse.

  3. Ralph on Thu, 26th Feb 2015 9:51 am 

    Make that $12.

  4. GregT on Thu, 26th Feb 2015 10:37 am 

    In the middle of October 2014 we were paying $1.24/L for gas at the pumps, by Jan1st 2015 gas had plunged to $0.99/L. This morning regular gasoline is selling for $1.229 per litre and prices continue to rise.

  5. shortonoil on Thu, 26th Feb 2015 12:04 pm 

    There are two important points that this article misses:

    1) When the storage becomes full demand will fall. The oil that is now going into storage is counted as demand.

    2) 80% full is probably an understatement. At least 10% of the present storage tanks are needed for blending.

    Demand for crude that produces fuels is likely to remain constant; demand for LTO will collapse. WTI, and Brent spreads will expand farther. There is likely to be very little extra saving for the consumer.

  6. Plantagenet on Thu, 26th Feb 2015 12:13 pm 

    Good point, short.

    The WSJ made a similar point yesterday–they pointed out China has almost filled its strategic reserve so they will reduce their buys of oil soon.

    This coming drop in demand will make the oil glut WORSE. Look for oil prices to fall farther.

  7. Northwest Resident on Thu, 26th Feb 2015 1:09 pm 

    When all the storage facilities and spare tankers are all filled up, where are the fracking companies going to store their “crude”? Maybe it is better to just leave it where it is, since nobody seems to want it anyway? Just an idea…

  8. Kenz300 on Thu, 26th Feb 2015 2:08 pm 

    Seems like solar and wind are safer and more reliable investments…….

    It might be time for OIL companies to look to diversify their energy portfolio and invest in wind and solar for the future. Change from OIL companies to ENERGY companies……..

  9. rockman on Thu, 26th Feb 2015 2:15 pm 

    NR – Before folks take the bait on this fabricated potential crisis of running out of oil storage we have more EMPTY Storage today than at any time in the last 4 years…about 65% empty. As of just a few weeks ago:

    “This year, they’ll have more scope than ever before to take advantage of the contango play: the capacity of U.S. commercial oil storage tanks has expanded by a third since 2010, while months of strong demand for domestic crude from North American refiners has prevented inventories from swelling too far. As a result, those onshore tanks are barely a third full, with less than 150 million barrels of the nation’s total 439 million barrels of shell storage capacity occupied as recently as October, according to a Reuters analysis of U.S. data. That’s by far the highest vacancy rate since the Energy Information Administration began a bi-annual survey of tank farm capacity — which exclude refinery stocks and oil in pipelines – in 2010”.

  10. synapsid on Fri, 27th Feb 2015 6:06 pm 

    rockman,

    October is a while ago. Are there more recent data?

  11. rockman on Sat, 28th Feb 2015 8:24 am 

    Syn – Waiting on the update. But considering the US alone had almost 300 million bbls of empty storage not that long ago I’m pretty sure there’s a lot left. Folks should remember getting oil to storage isn’t free: first, you have to buy it, pay to ship it to storage and then pay a storage fee. And then any future buyer is going to have to pay to ship that oil to them which would reduce the price they would pay to the oil storer.

    So the profitability isn’t just based on $X/bbl going into to storage vs the future oil price.

  12. ghung on Sat, 28th Feb 2015 8:39 am 

    CNBC: Oil storage in US close to running out: Pro

    “U.S. crude posted its first monthly gain since June on Friday, but one expert warned that storage in the United States is filling up quickly, and that could send oil lower.

    “We are really close,” said Bank of America Merrill Lynch’s Francisco Blanch, noting that storage could run out by the end of March or early April.

    Blanch, the firm’s head of global commodities and derivatives, told CNBC’s “Power Lunch” that means the only option for oil producers will be to sell and therefore prices can’t hold up.”

    Then, again, the article is a bit light on numbers,, as in no numbers actually cited. Wouldn’t want to bore folks I guess…

  13. ghung on Sat, 28th Feb 2015 8:41 am 

    Sorry…. here’s the link:

    http://www.cnbc.com/id/102464261

  14. Davy on Sat, 28th Feb 2015 9:16 am 

    G-man, that could be a market making ploy to drive prices down by the usual Wall Street thieves. But I do imagine storage filling up per the conversations I am seeing here and in the news.

  15. ghung on Sat, 28th Feb 2015 9:46 am 

    Yeah, Davy, always consider the source. If I read this right, Feb 20th total crude storage (less SPR) is only 6.3% higher, YOY.

    http://www.eia.gov/petroleum/supply/weekly/pdf/table4.pdf

    Anyone know what total storage capacity is?

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