Crude Overflow Creating Demand for Storage Options
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Fairway Energy Partners is drilling to a cavern 2,000 feet underground south of Houston’s Astrodome and plans to pump it full of 11 million barrels of oil. The project is one of many in Texas and around the globe that have sprung up to house the overwhelming supply of oil that is suppressing prices and forcing many producers to make drastic cuts in investments and jobs.
Worldwide, oil producers since late 2014 have been pumping an average of 1.5 million more barrels per day than the global economy can use. Much of the surplus has come to the United States, where imported crude has driven oil storage to record levels and shows little sign of slowing.
The demand for more storage has created big opportunities for companies such as Fairway, which is using several hundred million dollars in private equity funding to add new capacity. Other Houston companies that offer oil storage, such as Plains All American Pipeline and Enterprise Products Partners, are having no trouble finding customers for their tank farms.
U.S. pipelines, terminals and storage facilities held 523.2 million barrels of crude oil as of March 11, the most in modern records kept by the U.S. Energy Information Administration. Across the 34 most developed countries of the world, commercial storage held more than 3 billion barrels of crude oil and products in December, roughly 350 million barrels more than normal, according to the International Energy Agency.
“The demand for tanks is really exceptionally high,” said Eelco Hoekstra, the chairman and CEO of international storage giant Vopak. “People believe that the low oil environment might be there for a while because of the fundamental changes to the way the United States can produce oil.”
Still, capacity remains. While global storage capacity estimates are opaque, most market watchers say the U.S. is at about 65 percent capacity.
“It’s not like we’re about to spill crude out onto the ground,” said Brian Busch, an analyst at commodities tracking company Genscape.
“But if we don’t see an actual physical change in the fundamentals, then a year from now, it’s going to be a very different picture.”
Analysts warn that the sea of oil will weigh on prices for years. Most expect the millions of stored barrels to seep back out onto the market past 2017, ensuring that oil remains plentiful and prices remain low until refineries can burn through the backlog.
Space where available
But the burden on tanks isn’t distributed equally because oil is produced hundreds or thousands of miles from where it’s eventually refined. That leaves some parts of the country with capacity to spare, while tanks in other areas are brimming with oil.
Cushing’s tank farms are of particular importance because they’re the delivery point for West Texas Intermediate oil futures, the U.S.’ oil benchmark. A disruption at the logistics hub could have an outsized effect on the financial markets that depend on the city’s ability to smoothly process oil.
Drillers and refiners are closely watching the rising levels of oil. If storage becomes too scarce, producers could be forced to sell the barrels nobody can house for pennies on the dollar. Refineries use the space as a buffer to ensure a steady flow of oil and refined products. With less cushion available, markets could become more volatile.
But for now, tanks closer to the massive refineries along the Gulf Coast are taking extra crude. The Houston region has around 63 million barrels of storage capacity at terminals and refineries. Currently, utilization is about 60 percent full, according to Genscape.
But much of the remaining capacity is already reserved for long-term customers. Anyone looking to store crude on the short-term or spot market is having a tough time finding space, said Hilgert, the Fairway CEO.
“The Houston market is very tight,” he said. “There’s essentially no spot capacity left.”
Storage and markets
At the start of March, a barrel of oil sold on the spot went for about $34. On the futures market in March, oil to be delivered a year later was trading for nearly $40 per barrel. A rally in past weeks has brought current prices near $40 per barrel and future prices higher as well.
“You can buy and sell oil in six months at $5 above today’s prices,” said Morgan Downey, a former commodities trader and the author of “Oil 101.” “That provides an incentive to people with oil to store it.”
The cheapest storage is generally found in vast underground caverns or in tank farms, and those generally fill first. After that, more expensive storage is tapped until it’s no longer profitable to fill. The steeper the futures curve, or the larger the difference between today’s prices and future prices, the higher inventories build.
As conventional onshore storage has filled, some traders have gone looking elsewhere for space. Genscape’s Busch, for example, said he’s heard reports that unused rail tank cars are being filled with crude. Traders also are looking to fill oil tankers and park the vessels offshore.
So far, the difference between future and current prices hasn’t been large enough to generate much interest in floating storage, said Jamie Webster, a crude oil analyst at energy consulting group IHS.
“At least on a global basis, the economics are not really there,” Webster said, adding that it may come soon. “I still anticipate that some floating storage is likely to take place.”
Otherwise, “what the inventory will ultimately do is keep a lid on any rally in prices for a substantial period,” said Dominick Chirichella, senior partner at the Energy Management Institute, a research group.
The EIA estimates that the draw-down will take place after 2017. Until then, EIA analysts project that global inventories will continue to rise by 1.6 million barrels per day in 2016 and by 600,000 barrels per day in 2017.
“These inventory builds are larger than previously expected,” the EIA said, “delaying the rebalancing of the oil market.”
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