US May Run Out Of Oil Storage Space As Soon As June

Tyler Durden's picture

On Sunday, we noted that the economics of the floating storage play could spell further declines for crude prices. With a global stock increase that’s some 3 times larger than that which occurred during the last period of oversupply, expect cheap, on-land storage to prove inadequate necessitating the use of VLCCs. According to Soc Gen, determining how far the front end of the curve would have to fall in order for traders to arbitrage the difference between buying and storing physical oil and selling paper forward is a good indicator for where prices may find a floor: 

...the bank is looking for the front end of the curve to fall until the contango is wide enough to make the floating storage play enticing. 

 

The example Soc Gen uses shows that Brent needs to see ~$49 before the trade is sufficiently profitable. 

The takeaway, we noted, is that storage availability and contango should be taken into account when considering the future direction of oil prices. With production still climbing despite the decline in rig count, it seems supply may, in short order, outstrip storage capacity for as the following two charts show, crude storage capacity in the US is now at 60% and is set to be completely exhausted by June: 

 

From the EIA: 

Crude oil inventory data for the week ending February 20 show that total utilization of crude oil storage capacity in the United States stands at approximately 60%, compared with 48% at the same time last year. Most U.S. crude oil stocks are held in the Midwest and Gulf Coast, where storage tanks were at 69% and 56% of capacity, respectively, as of February 20.

 

Capacity is about 67% full in Cushing, Oklahoma (the delivery point for West Texas Intermediate futures contracts), compared with 50% at this point last year.

 

What this means is that over the next few months, the contango breakeven trade will become increasingly more unprofitable as the cost of remaining storage goes through the roof (i.e. prices would need to fall even farther for the the floating storage play to be economically viable). 

Here's FT

Demand for facilities where it is easy to move crude and refined products in and out has increased: from European and US hubs, to South Africa, South Korea and Japan. In Europe, it is understood traders are in talks about the construction of new tanks, which is a characteristic of the 2008-09 “supercontango”.

 

US storage levels are being closely watched as commercial crude stock piles rise rapidly. They hit 444.4m barrels last week, the highest level for this time of year since the 1930s, according to government data.

Come June, when all available on-land storage is exhausted, each incremental barrel will have to be dumped on the market forcing prices lower and inflicting further pain on the entire US shale complex (just as Q1 results are released which will invariably show huge writedowns as companies will no longer be able to hide behind the SEC-mandated accounting trick that made Q4 results appear respectable). Here's Soc Gen: 

...oil markets can be impatient and prices could drop considerably lower. As we have written previously, we are currently more concerned about downside risk than upside risk.

Meanwhile, investors (who never, ever learn and who piled into oil ETFs ahead of the widest contango in four years) are diving in head first: 

From WSJ:

Investors are snapping up new stock and bonds from energy producers as they search for bargains amid the tumult caused by the plunge in oil prices.

 

Some investors are lured by cheap prices, while others are hoping to prop up companies in which they have already invested and keep creditors at bay. High interest rates on the new bonds—12% annually on some—are also attracting buyers at a time when rates on safe government debt are low.

 

“If you like a company, you can get something at half-price,” said John Groton, a senior equity research analyst at Thrivent Asset Management, an investment-management firm that oversees roughly $96 billion.

 

What's that old saying about falling knives again? 


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wrs1's picture

More of this stupidity.  Refineries will be ramping up soon and the drawdowns will begin. Notice they didn't bother to include the refinery utilization figures in any of this blather.

pods's picture

What if we put it down those shale holes that ran dry?

I can see a sweet business opportunity.  Pull it out of one hole and into another, then switch once one goes bust.

Man I'm good.

pods

stant's picture

Krugman just shot all over his cat

Publicus's picture

World War 3 starts as soon as June.

flacon's picture

Can't they just drill for oil and then dump it into the ocean creating arificial demand? That's the way Keynesian economics produces prosperity for all. Then they could HIRE a bunch of unemployed teens to clean it all up, thus stimulating the economy and protecting the environment. 

InanimateCarbonRod's picture

last recorded 690 million barrels vs 720 mil capacity.

0b1knob's picture

Since future prices are higher than spot, why don't people just store oil at sea in floating storage?   Oh wait....

http://www.businessinsider.com/colossal-oil-tankers-storing-contango-pri...

There is a LOT of oil sloshing about the world.

Greenskeeper_Carl's picture

GENIUS. when do the AAA rated refilling empty wells with shale oil backed securites become available so i can leverage up and invest in them?

NoDebt's picture

pods, that was my idea weeks ago.  Pay one company to drill it out of the ground, pay another to put it back.

I'm not angry, though.  I'm just glad it's an idea that's gaining traction and with any luck will soon be a reality.  If it's not, we can always make the government do it.  And they can take the carbon credits for every barrel they stuff back down the hole because it will never be burned to release carbon into our oh-so-fragile atmosphere.

 

 

Haus-Targaryen's picture

My God the whole world has gone insane.  

Good thing I don't own any commercial property in the Houston Texas area.  Those guys have gotta be shitting cinder blocks at this point & time.  

Abbie Normal's picture

With the price of Western Canada Select oil already below U$40, there will be pain.

pods's picture

Well if we independently thought this one up it has to be a moneymaker!  

I'm liking the carbon credits enhanced version.  Pretty soon we will get credit for NOT eating burritos for lunch.  

And we can tax Taco Bell too!  Well, maybe a half tax for Taco Bell as that never seems to be all of anything and a lot of everything on the backside, but that TMI is a bit of a digression.

Wait, we can have fans collect the atmosphere in Taco Bell and run it to fuel cells and charge our Chevy Volts.

And have a midget on top of a retarded giant at each Taco Bell to really give you the full effect when they turn the valves.

pods

 

NoDebt's picture

"Wait, we can have fans collect the atmosphere in Taco Bell and run it to fuel cells and charge our Chevy Volts."

They'll just shove a pipe up all our asses.  I mean, why not?  They've already got plenty of experience with that sort of stuff.

JuliaS's picture

Moistened shale - the best thing since salted mine.

ABCDEF123456's picture

Interesting thought, and not far fetched at all. esp with the increase rigs going idle...

Being in the construction industry, more specifically industrial coatings specializing in Pipe Lines, Refineries, Crude Storage Tanks, etc... Got an interesting call from our BP Purchaser.

Last Feb. (2014) - Our company was awarded a 3 year contract for maintenance painting across the the US. That being said, He was calling to ask for Rebates due to the drop in oil prices. He continued on to say it would only be temporary (12-16 months), and that all Purchasers were directed to reach out to all contractors for rebates.

Taking it one step further, there is no contractual language covering these "Spontaneous Rebate" requests. Whats worse, is the fact that if we fail to offer a rebate; the current maintenance contract will be the last.

Just goes to show how desperate oil companies are getting, and the +/- $50 handle most likely still has room to fall

 

Bunghole's picture

"Refineries will be ramping up soon and the drawdowns will begin."

Oh really?  The EIA data suggest otherwise for idle refineries.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MOCIDUS2&f=M

Same for gross input to refineries.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MGIRIUS2&f=M

Here's historical refinery utilization rates.  Looks like we were at 94.2% utilization in Dec 2014.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MOPUEUS2&f=M

disabledvet's picture

Green Plains Energy went through the roof last week (ethanol.)

Good luck not being a refiner....

Haus-Targaryen's picture

Can't be much longer before tanker "recyclers" start pulling their backlogs out of storage into international waters, loading them up to the brim and just let them sit there.  I bet they make a fortune as well.  

They have to do something to offet the dried up supply of licensed tankers in operation.   

KnuckleDragger-X's picture

That's already happening and the Saudi's will be hit by it. At the rate things are going, if one major economy takes a shit, it will implaode the entire sector.

Haus-Targaryen's picture

I think we are too far down that path my friend.  

Once one economy takes a shit (not if) it will implode the entire world financial system.  

 

KnuckleDragger-X's picture

Yeah, tumbling dice and falling domino's......

Big Corked Boots's picture

Just order some of those big rubber bladder tanks from the .mil suppliers. Problem solved.

Big Corked Boots's picture

Even better, just seal off the holes in all the unused dry bulk ships (Baltic Dry, anyone?) and use them as temporary tankers. It's not like they're hauling anything anyway.

NoDebt's picture

If you could keep the insanity level right there but drop your preoccupation with actually trying to fix anything, you could be our next President (assuming Obama ever leaves).  I'd vote for you.

 

pods's picture

I want to know what they are going to do about the burrito covering shortage!

KnuckleDragger-X's picture

Burrito derivatives of course......

disabledvet's picture

Dont even. Bother with drilling and storage or tansporation even...just put a bunch of numbers on a piece of paper and call it an oil company.

joego1's picture

Won't be anything left to do but have oil storage accidents. Already seeing lots of trains derailing.

disabledvet's picture

Exactly! By making the entire thing a fraud you're actually keeping people safe too!

"Call it an IPO"...spread rumors, attract attention, make ridiculous claims. It's all good!

Save the children of Africa!

Fun Facts's picture

crystal ball sees an even bigger contango developing

carnage for oil ETF bozos

Winston Churchill's picture

O/T Russia just left the CFE military agreement.

Juncker better hurry up on the EUarmy.

KnuckleDragger-X's picture

It's not just how much but where. Storage where there are few refineries isn't the same as capacity in refinery heavy area's. Cushing is the biggie since they pull from a lot of the big producing area's to feed most of the refineries. This will have a bad effect in the shale patch where things are already tough.

thamnosma's picture

Wrecking the shale oil industry is perhaps one of the goals.  Works for the Saudis and works for President Jarrett.

ParkAveFlasher's picture

WE'RE ON AN EXPRESS ELEVATOR TO HELL, GOING DOWN!!!

NoDebt's picture

Somebody wake up Hicks.

 

1stepcloser's picture

Dump it into the gulf...who would notice?

Kirk2NCC1701's picture

Yo! Sounds like we got us some SHOVEL-READY projects: Build moar oil mega-storage tanks.

'Bama!

ejmoosa's picture

Can't fix stupid...

eyesofpelosi's picture

I'm sure there's room at the White House.

Winston Churchill's picture

That would ruin the new thatched ceilings and matching leopard print rugs.

eyesofpelosi's picture

But it would cover up the smell of fried chicken and KY Jelly.

thamnosma's picture

Why not immediately add to storage capacity and load up while this precious material is cheap? 

Bunga Bunga's picture

Build baby build. Can't go wrong.

Jethro's picture

I designed a tank farm in Cushing several years ago.  Huge tanks.  Our pipeline work hasn't tapered off any.  We haven't had any rail projects in quite awhile though.