Where Can I store My Oil?

Jim Brown
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The EIA reported crude inventories in the U.S. rose to 413 million barrels last week and the highest level since the EIA began keeping records in 1982. I have seen other reports based off older and less reliable inventory records that this is the highest level for January in 80 years.

This is not just a U.S. problem. Refiners the world over have been stocking up on as much oil as possible at these low prices. The IEA said recently that available storage was almost full and even China's strategic reserves were almost full. Whenever these tanks actually reach their maximum levels and inventory buying is halted there is going to be another sharp decline in crude. At least that is my theory and I am sticking with it.

The world is currently producing about 1.5 mbpd more oil than it is consuming. That means about 45 million barrels per month has been going into storage. When that storage is full that 45 million barrels will have no place to go. That means buyers with storage capacity will be able to lower their bids significantly and producers will be faced with either accepting less for their oil or halting production. Nobody wants to halt production. Besides the technical and logistical problems with slowing/halting production they need to keep the oil sales flowing in order to pay the bills.

Making this problem worse are the speculators that have been leasing available oil storage both on land and on seaborne tankers to capitalize from the contango. That means oil prices in the futures market for delivery in the coming months are higher than prices in the spot market. The price for December delivery is $61.28 today compared to March delivery for $53.18. If you can find somewhere to store March oil you can sell it into the futures market and make a profit from the spread less the cost of storage. This is further complicating the storage issue as the available storage tanks are fought over by the speculators.

About 90% of global storage capacity is "captive" or controlled by major producers like BP, Shell, Exxon, Chevron and Saudi Aramco. That means only about 10% is available for short term storage. Those big oil companies are not going to lease out their available storage because that means they will have less capacity to store their own oil if the glut continues for the rest of the year.

Oil trader Vitol, Koch Industries, Shell and Trafigura Beheer BV have already leased tankers for one-year charters to store their excess oil. Ship brokers Optima and Dynacom Tanker Management have both reported a surge in requests for customers looking to lease tankers to store large quantities of oil of 20 million barrels or more each. During the financial crisis in 2009 traders stored more than 100 million barrels at sea according to tanker owner Frontline Ltd.

Obviously there is a limited supply of tankers and onshore storage tanks. Once those tanks are full the price of oil will implode as a bidding war develops in an effort to sell excess daily production. The key unknown is when this will happen. Buyers including refineries stocking up for their own use have been loading up for months. Demand for refined products, at least in the U.S., has only increased slightly thanks to the cheap prices and I am sure that is the same around the world. Unless it increases by at least 1.5 mbpd in the next few weeks, which is highly unlikely, we are going to reach that point where storage is full and production will have to be halted. That could be two weeks from now or two months from now. Nobody knows when it will happen. As we near that point prices should begin to decline as it becomes harder and harder to store excess oil.

Fortunately we are heading into the high demand summer driving season starting in May. Currently we are nearing the March maintenance season for refiners. This is when they shut down processes to upgrade equipment or repair existing problems. They also use the March maintenance cycle to switch over from winter blends to summer blends. For emissions reasons the gasoline blends we use in the winter are different from the blends we use in the summer. Refiners have to change their processes to produce a different blend of gasoline.

This means inventories should continue to rise until Memorial Day. That is the kickoff for the summer driving season. With inventories at record levels and three more months of normal inventory accumulation there will be some inventory stress in the weeks ahead.

The U.S. refiners are profiting from cheap oil in the U.S. and the high price for refined products overseas. Refineries are running at 90% utilization not because of increased demand in the U.S. but the ability to export refined products. This has become a big business since the price of WTI declined significantly below Brent several years ago.

Did you enjoy that cheap gasoline in the U.S. while it lasted? The spike in crude prices created a corresponding spike in gasoline price. They say gasoline prices rise like a rocket as oil prices rise but decline like a feather when crude prices decline. That was evident last week when gasoline prices rose as much as 20 cents in one day. The national average bottomed out at $2.03 per gallon the prior week and then shot up to $2.28 per gallon in states like Michigan and Ohio. Prices literally rose 20 cents overnight. This is still better than the $3.49 this time last year so enjoy it while it lasts.

Active Rigs

The number of active oil and gas drilling rigs has fallen -475 from 1,931 in September to 1,456 today. The last eight weeks have posted the sharpest decline since records were started in 1987. Oil rigs declined -83 for the week to 1,140. Active gas rigs fell -5 to 314 and up from the 18 year low of 310 three weeks ago. The prior low set on April 4th, 2014.

Canadian rigs declined -13 to 381. This compares to 621 for the same week in 2014.

Other than during the financial crisis the number of active rigs has been above 1,700 since the beginning of 2006. We are poised for a significant decline, possibly to the 1,100 level. The pace of decline will scare additional companies into panic mode.

Baker Hughes warned that in those previous oil declines of 50% or more the active rig counts declined by 40% to 60%. So far we are only down -25% so we have a long way to go. A 50% decline in oil rigs would be -805 from the 1,609 peak on October 10th. So far we have declined -375 oil rigs so we could lose another 400 before it is over.

Oil Inventories

Crude inventories rose another 6.3 million barrels to 413.1 million and the highest level for February since 1930. Crude inventories have risen +30 million barrels over just the last four weeks. Refinery demand for crude rose by +288,000 bpd. Refinery utilization rose from 88.0% last week to 89.9%. Imports declined -35,000 bpd. U.S. production declined fractionally to 9.177 mbpd from 9.213 mbpd and the highest level since 1986.

Cushing inventories rose +2.5 million barrels to 41.4 million.

Gasoline inventories rose +2.3 million barrels to 240.7 million. Gasoline demand fell a whopping -580,000 bpd while imports rose +75,000 bpd.

Distillate inventories rose +1.8 million barrels to 134.5 million. Demand crashed by -883,000 bpd to multi-month lows at 3.68 mbpd and imports increased +413,000 bpd.

The drop in distillate demand is related to the nearly 10,000 flights that were cancelled ahead of the winter storm that was expected to shutdown the Northeast two weeks ago.

In the graphic below green represents a recent high and yellow a recent low.

Propane inventories declined by -2.07 million barrels to 67.24 million. Demand was flat at 1.61 mbpd. With the cold weather continuing this week we should see higher demand over the next several weeks as late winter refills begin.

Natural gas inventories declined -115 Bcf to 2,428 bcf. Inventories are now -1.2% below the five year average at 2,457 Bcf and +23.9% above year ago levels at 1,960 Bcf. With only 6 weeks left in winter there will be no gas shortage like we had in early 2014. With 2428 Bcf in storage and an average of -150 Bcf in weekly demand that will only deplete 900 Bcf unless a new ice age suddenly descends on the Northeast.

After inventories being low for the last year they are right in line with the five year average today.

The blue line in the chart below shows the current inventory relative to the five year average.


The market rebounded last week with the Dow adding 600+ points. The Dow and S&P closed just under significant resistance. S&P futures are down -9 late Sunday as a result of unrelated headlines from Greece and Russia. The EU will place new sanctions on Russia on Monday after a long negotiating session between Merkel, Hollande and Putin failed to resolve the crisis in Ukraine. The newly elected Prime Minister of Greece gave an impassioned speech on Sunday that showed no intent to back down from his anti austerity pledge with only a week remaining before the deadline for additional bailout funds. The odds of Greece leaving the Eurozone are growing every day.

Jim Brown

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