The Perfect Storm For Oil Hits In Two Months: US Crude Production To Soar Just As Storage Runs Out

Tyler Durden's picture

Less than two weeks ago we warned that based on the current oil production trend, the US may run out of storage for crude as soon as June.

This is what we said back in early March when the BTFDers were hoping WTI in the low $40s would never again be seen:

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."

Since then, as expected, crude tumbled to new post-Lehman lows, confirming the global deflationary wave is raging (for more details please see China), and WTI only posted a rebound on quad-witching Friday as another algo-driven stop hunt spooked all those who were short the energy complex.

The problem is that despite the latest "dead oil bounce" we have since had to revise our forecast for full US oil storage, and pulled forward the date when this will happen in the aftermath of the latest API inventory data.

Recall that earlier this week API reported, and EIA later confirmed, that for the 10th week in a row there was a "massive 10.5 million barrels (far bigger than the 3.1 million barrel expectation) and a 3 million barrel build at Cushing. If this holds for DOE data tomorrow (and worryingly API has tended to underestimate the build in recent weeks) it will be the biggest weekly build since 2001."


The DOE indeed confirmed all of this:

It also means that at the current rate of record oil production, storage will be exhausted in under two months, some time in mid-May. At that point, with no more storage to buffer the record oil production, the open market dumping begins and prices of WTI will crater as every barrel will have to be sold at any clearing price, since the producers will have no other choice than to, literally, dump the oil.

In other words, a perfect storm is shaping up for oil some time in late May, early June.

And then we learned something even more startling.

As the Platts oil blog reports, even as oil prices continue to fall amid flat demand and near-record supply, "North Dakota is likely to see a “big surge” in production this June, potentially besting another supply record even if prices continue to crater, according to Lynn Helms, director of the state’s Department of Mineral Resources."

What make things worse is that this time the production "surge" will have nothing to do with game theory, or beggaring thy oil producing neighbor in hopes that the other, more levered guy goes bankrupt first.

This surge will be largely propelled by two factors: a state-mandated time limit on drilling and the expected trigger of a major oil tax incentive, Helms said.

Here is how Bakken production has looked like in recent months:

Helms, the state’s top oil and gas official, reported last week that North Dakota oil production fell about 3%, or about 37,000 b/d, to 1.190 million b/d from December’s all-time high of 1.227 million b/d. The reduction was expected as sweet crude prices averaged $31.41/barrel in January, down from $40.74/b a month earlier and the statewide rig count fell by 21 to 161.


But Helms said he doesn’t expect production to tumble dramatically, even as prices continue to fall, and even though he expects the statewide rig count to “bottom out” at about 100 rigs. Production, he said, will likely remain between 1.1 million b/d to 1.2 million b/d over the next few months.

Nothing surprising.

And then this will happen: "Bakken production could suddenly skyrocket, by nearly 10%, or an additional 75,000 b/d, to 100,000 b/d in June, Helms said." This means that despite low prices and production curtailments throughout much of North America, oil production in North Dakota could actually shatter a new record this summer!

This is mainly due to a backlog of between 800 to 1,000 uncompleted wells statewide, about 125 of which need to be completed by the end of June in order to comply with state requirements to complete drilling within a year.


At the same time, operators may wait until June, when a major oil tax incentive known as the “large trigger” is expected to go into effect. The large trigger, which is aimed at boosting Bakken production at times of low crude prices, enters into force when the WTI crude price averages below $55.09/b for five consecutive months.


If that incentive is triggered, which Ryan Rauschenberger, North Dakota’s tax commissioner, said he expects will happen, the majority of wells will be exempt from a 6.5% oil extraction tax for as long as two years.


With that tax break in effect and hundreds more wells running up against one-year state deadlines, production in North Dakota could continue to surge even beyond the summer.

“We’re going to ride these waves of production increases,“ Helms said.

And that, coming just as US spare oil capacity hits its limit, is precisely what all those BTFDers who bought first junk bonds, and most recently, a desperate scramble in follow-on equity offerings by the universe of cash burning US shale companies, is precisely what they did not want to hear. Because no amount of Fed ramblings about the ever weaker US economy will offset what is about to be a veritable oil tsunami.

The time to buy asset may be when there is blood on the streets, but the moment to dump crude (and buy deep OTM puts) will be precisely when the majority of investors and algo-programming math PhDs realize that in just about two months the streets are about to become black, covered entirely in oil.

h/t Lizzy

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stant's picture

Bring back the big blocks!!

knukles's picture

No! Wait! Everybody's been yelling about no more oil by 1979!

Whole bunches and bunches of them old creaky useless rusty leaking VLCC's are gonna be unmothballed with skeleton crews to sit just off shore filled to the brim with grim.

NoDebt's picture

Yep.  Excess tanker capacity?  No more on-land storage?  No problemo.  It's now floating storage.

Philo Beddoe's picture

You are being generous.  I am assuming there shall be frontrunning. 

Philo Beddoe's picture

WTF! Take away those down arrows for NoDebt. 

Publicus's picture

We will never run out of abiotic oil.

ZerOhead's picture

No oil storage left?

What about utilizing those dry reservoirs in California... did those enormous salt caverns under Lake Erie suddenly disappear?

Yes We Can. But Lets Not.'s picture

You know, they're squawking here in So. Cal. about the Salton Sea - which was created by errant water diversion decades ago - drying up, since the dry lake bed would the the source of awful dust problem.  That sucker - which is a complete shit-hole - would hold a truly massive quantity of oil, and that'd keep the dust down but good.

The Black Gold Sea.

XqWretch's picture

Time for war, gotta increase demand somehow

Bangin7GramRocks's picture

Sarah Barracuda says, "Drill Baby Drill!"

Richard Chesler's picture

Sorry jackasses and peak-oilers. It was always a $20 commodity.


imaginalis's picture

I wouldn't mind striking the V12 off my bucket list so I might be able to help.

cnmcdee's picture

Go long Enbridge and CBI - Enbridge builds tank farms - and contracts CBI to build the tanks - and the *love* to stockpile oil, they are going to build tanks like a bastard (a lot of oil companies are going to do the same) - but the reality is the number one tank builder in the world is CBI..

Handful of Dust's picture

Ran into a guy who runs a food bank in Houston, Texas who said number of people now seeking emergency food there up over 300%, mostly layed off oil and gas rig workers.



Tall Tom's picture

Now we need some destruction of the Oil Refinement Cracking Towers.


That will ensure high Unleaded Gasoline prices with a surplus of unrefined Oil.


Bring on your professional arsonists you Oil Company magnates. You will not be prosecuted. You are too big to jail.


The model works so swell in Southern California that it needs to be extended to a nation wide instituted program.


Everybody needs to be charged $3.30 per gallon.


This is also a fantastic opportunity for refinery operators to stage a STRIKE for higher wages.


Short WTI and Long Unleaded Gas.

Tall Tom's picture

A little bit too real for you junker???



Crash Overide's picture

Oil sucks, it should crash back into the ground.

So you are telling me that it's 2015 and we STILL use oil for a primary energy source?

In the computer industry we went from some of the first COBAL machines in the 40's to smart phones in the 00's but oil is the best answer we got?

Just like the space program has come so far since we first made it through the Van Allen radiation belts and landed on the moon?

It's a joke... don't you think we should have been a lot further along at this point considering some of the talent on this planet?

Funny how some industries don't make any progress, maybe easier to control people with computer technology and smart phones than space travel. 

Tall Tom's picture

It is not a joke. It is evidential that we still burn Fossil Fuels.


And you can wager that the Oil Companies will destroy refineries and have the Refinery Workers Unions stage strikes.


And you can downarrow this all that you want.


But I am certain that the Oligarchs will not lose one thin dime.


Short WTI.


Long Unleaded Gas.



sun tzu's picture

Most E&P's are not integrated, so how would low WTI and high gas prices help them?

Tall Tom's picture

High Unleaded Gas prices hedge against low Oil prices.


Profits are garnered at the sell side rather than the buy side,


They buy the Futures too. As the future price declines their balance sheets bleed as the futures are future inventory assets which are declining in "value" as the price slides.


They do take delivery after all..


They will manufacture a shortage if they want to produce short term profits. They have to if the want to show a profit to support stock prices.


They have used San Diego, CA many times to do this. We typically have the highest Gas Prices in the Contenental USA. This has become an standard practice.


It is a little counterintuitive but mark my words as you watch the "Black Swans" of Employee Strikes at Refineries and Refinery Fires develop..

Thirst Mutilator's picture

 "In the computer industry we went from some of the first COBAL machines in the 40's to smart phones in the 00's but oil is the best answer we got?"


That's the dumbest fucking analogy I've ever heard of.


Next ~ You're gonna be telling everyone that because of computing power, fats, proteins, & carbohydrates should no longer be necessary.


Keep eating those hotpockets at your desk Coppertop.  The transhuman machines that you create prolly won't give a FF what you ate when they turn you into a Duracell.

JohninMK's picture

COBOL in the 40s???

Original design in 1959 by USN it became a standard in 1968.

TuPhat's picture

I didn't know the dates but I knew the 40s was just crap.  Thank you JohninMK.

patb's picture

I just bought a Chevy Volt.  All our in town errands are now on Electric, have had it a month

and have burned about 3 gallons of gas.  If i am buying a tank every 3 months instead of every week,

I'll be happy.

Karaio's picture

Four months ago I talked about it ...

"Accidents" in oil refineries ...


pgroup's picture

So all those roughnecks that get laid off from the shale fields are headed for Cushing to build really big barrels? Gotta love dat free market labor.

Obama LaForge's picture

No, this is part of peak oil. As the world runs out, extracting oil becomes unprofitable. Wait for bankruptcies, then shortages.

harposox's picture

Yep. IIRC it's called the "bumpy plateau" — as the oil becomes increasingly difficult and expensive to extract, we'll see massive volatility in prices as we vacilate between over- and under-supply, and highly leveraged oil companies go belly up. I think Colin Campbell was the guy who coined the phrase.

Van Halen's picture

Sarah Barracuda was responding to the fact that we were - pardon the pun - bent over a barrel because we had so much oil of our own oil but were relying on the Middle East and other nation areas. And that also was six years ago.

Bangin7GramRocks's picture

There was plenty of oil then, and there is plenty of oil now. The "demand" was for oil contracts. That dimwit was only repeating what she was told like some kind of retarded parrot. The ultimate puppet candidate and a truly embarrassing event in the history of The United States.

SRSrocco's picture

U.S. Oil Production To Soar????

Well, Platts just pulled a BIG BONER on that call.  Art Berman, who may understand the situation than Platts believes we are going to see a 600,000 barrel per day decline from Shale Oil by June.  No Soaring production.

Shale Oil Production Will Fall 600,000 Barrels Per Day By June

Furthermore, the North Dakota DMR just released their JAN REPORT and the Bakken's production declined 38,000 bd in Jan.  I believe FEB will be down as well.  In addition, even the EIA recent March Productivity Report shows a forecast in declines in 3 of the 4 large Shale Oil Fields in April.

Those who study the EIA Productivity Reports realize they are a BIT OPTOMISTIC.  So, we may see much worse declines.

Sure...the builds might continue... BUT U.S. OIL PRODUCTION IS HEADING SOUTH by JUNE.

You can take that to the BANK.

SRSrocco Report

sun tzu's picture

She isn't too bright, but still has a higher IQ than the affirmative action idiot we have now

patb's picture

She isn't too bright



That's an understatement.


RevIdahoSpud3's picture

Sorry, the most embarrassing moment in world history was the "placing" (not election) of Barack Mulatto Hussein Soretoro Obama as the puppet in chief.

Farqued Up's picture

Yes We Can. But...

Luddites are alive and high-kicking in SoCal, guided by Moonbeams. The FDA and Big Pharma will thin that herd of sheep especially with a seasoning of Monsanto GMOs sprinkled in. There are some brilliant people there but not nearly enough to elevate the average.

HAARP will chase off the smart ones looking for some swamp land awash in H2O. Good, the bridges to nowhere and swamp land have been the butt of jokes forever.

The irony is that maybe the world's largest aquifer lies under the Sahara. Hey Houston, don't stack the rigs just yet.

_ConanTheLibertarian_'s picture

Wait till someone throws a match in there. That should be fun.

bh2's picture

... and then they could trade it straight across for water -- drought problem solved! :)

vaft's picture

This is a good idea; We can pump oil out of the ground and then store it all ... underground. It's like creating "shovel ready" jobs by hiring someone to dig a ditch, and then hiring someone else to fill the ditch back up again. It's so brilliantly Keynesian, it could only lead to a permanently high plateau.



Escrava Isaura's picture



Reading the article makes you realize how financialization, and manipulated data, distort reality.


Anyway, can’t blame Zero Hedge, and many Hedgers, because Zero Hedge is more focused on the financial aspect of this ‘Crude/Condensate’ conundrum.


I would strongly suggest you to read these, if you want to understand:



zhandax's picture

As I quoted here several years ago, "The stone age did not come to an end for a lack of stones"

Handful of Dust's picture

I'm gonna have to agree with the petroleum engineer down the block who says it may drop to $10 BUT the rebound will be brutal [maybe up to $200] after most of the rigs and wells are capped off and small drillers bankrupt/shut down due to this slump and then a rleative shortage of painful proportions will hit us.


Sounds Logical ... but when in the last 12 years have logic or fundamentals had any bearing on the market?

RadioactiveRant's picture

If the rebound is brutal, sky rocketing CPIs could be the event to finally push rates up and start the inevitable unwind of the carry trade.

Never One Roach's picture

My guess is the Fed and BLS will never allow the CPI to accurately reflect prices since the gubmint cannot afford the SS COLA and most likely same for penion plans that are linked to the CPI in light of almost zero returns on their portfolios the past decade. In fact, many if not most pension plans are underfunded according to recent news reports that even the MSM report.


The CPI equation will simply be 'modified' with more hedonistic tweeking and elimination of any commodity or service that rises since that's what they have been doing with just about every other Bogus stat coming out of DC.


Thus, oil and gas prices [and everything else we need like food] will soar while the CPI remains artifically low [like it has been the past decade].

Eeyores Enigma's picture

Us consumes almost 20 millon bpd so total storage is a month or two? Just when driving season starts and ag diesel ramps up?

SOmeone is selling a bridge.


sun tzu's picture

What part about out of storage space do you not understand? At that point, if they can't find a buyer as the crude comes out of the ground, the price is ZERO. 

Calmyourself's picture

Lots and lots of Goldman & JP Morgan tankers to fill, no worries they will find a place for it.

ebear's picture

"We will never run out of abiotic oil."

You can't run out of something that doesn't exist, so yeah.... that's a true statement.