Wolf Richter www.wolfstreet.com [12] www.amazon.com/author/wolfrichter [13]
“We don’t want to lose our share in the market,” Kuwait Oil Minister Ali al-Omair said on Thursday. OPEC had to maintain production despite the plunge in price since last summer, he said, underscoring Saudi Arabia’s position. OPEC would not cut production to goose prices. It would not let the American fracking boom off the hook.
The price of oil promptly dropped, annihilating much of the Fed-inspired rally the day before.
No one wants to cut production. In the US, production is still soaring. Demand is lackluster. What gives? Crude oil is piling up around the globe.
Commercial inventories across all OECD countries can now supply 28 days’ of OECD demand, near the very top of the range, the EIA reported [14].
In the US, the amount of oil in commercial storage facilities (not counting the Strategic Petroleum Reserve) is at historic highs. Another 9.6 million barrels were added during the latest week. To put that in perspective: the US produces 9.3 million barrels per day. So in one week, the US added nearly one day’s production to its already high crude oil stocks! According to the EIA, stocks now amount to 458.5 million barrels, up 22% from a year ago.
By another measure, at the end of February the US was sitting on 29 days’ supply, the most since the 1980s when the last big oil bust was wreaking havoc in the American oil patch.
Speculation is now running wild that the US will run out of crude oil storage capacity. Some voices are claiming that storage in Cushing, Oklahoma, which accounts for 14% of the US total and serves as delivery point for WTI futures contracts, could be full by April.
These speculations have dollar signs at the other end. When storage gets scarcer, or when the perception can be stirred up that it will get scarcer, storage fees jump, boosting revenues and profits of the storage companies. There’s money to be made, as long as the speculation can be maintained. And so the insiders came out all guns blazing.
“Demand for our storage services in Cushing has been robust,” said Robb Barnes, senior VP for commercial crude oil at Magellan Midstream Partners LP, according to Bloomberg [15]. The company has 12 million barrels of storage capacity in Cushing, and all its tanks had been leased, it said.
Fees have been rising “fairly rapidly over the last six months,” Blueknight Energy Partners CEO Mark Hurley told investors. The company has 6.6 million barrels of capacity at Cushing.
All publicly traded storage companies have told investors that profits in 2015 would be higher than in 2014. At least someone is making money during the oil bust.
And it’s not just in the US.
“You’ll find all the locations around the world that can store crude now, like Saldanha Bay or the Caribbean, are going to be full,” said Jared Pearl, commercial director of VTTI in Rotterdam. The group includes Vitol, the largest independent oil trader. “It would be crazy if they weren’t.”
And just when we might be tempted to think – cynical as we are about these sorts of things – that they were just talking their book, China, second largest oil consumer in the world, chimes in.
China has been buying cheap oil since August to fill its Strategic Petroleum Reserves. This buying has been one of the demand drivers in Asia and has provided some support even while prices crashed. The government keeps largely mum about the SPR. But the plan is to increase it to around 600 million barrels, which would be about 90 days’ worth of imports. According to Reuters [16], most estimates place current storage levels at 30-40 days’ worth of imports. In December, China imported an all-time record of 7.2 million barrels per day. Alas…
“I don’t think there is much space left to fill,” a Chinese storage executive told Reuters under the condition of anonymity. He said that in the Zhoushan area of Zhejiang province, where two SPR bases and major commercial storage facilities are located, tanks “are so full that one VLCC tanker owned by a state refiner has had to wait for almost 15 days to discharge.”
Then there is the demand issue. The Chinese economy is growing, according to government figures, at the slowest rate in 25 years. And now there are expectations that refiners could process less crude in the second quarter. So China will likely curtail its purchases, at least temporarily.
Including China, Asian crude oil imports overall have dropped 5% from the peak in December, according to Thomson Reuters data. Imports by India were down 20% in February from a year ago; imports by Japan were down 11%, largely due to the approaching refinery maintenance season.
Even if these folks are talking their book to goose storage fees, one thing is clear: storage levels are high around the globe, and they’re still rising, while demand is nothing to write home about. It adds to the picture of a worsening global oil glut that will continue to pressure prices, bloody up producers, and maul investors and lenders.
The fracking boom in the US started with natural gas. And now it’s destroying its investors. Read… Investors Crushed as US Natural Gas Drillers Blow Up [17]