A constant stream of hyprocrisy from Fed officials (will print "moar" money if stuff happens), the EIA (storage is getting fuller and fuller, but production will be lower than expected and forecast prices are higher even though lifting Iran sanctions will trim $5-$15 from the price of oil [8]), and Saudi Oil Minister Naimi's idiocy (increased production, demanding non-OPEC cooperation, but optimistic on prices recovering in the short-term [9]) has sent crude asymmetrically rocketing higher, which is now apparently a good thing for US equities and umabiguously gooder for the US consumer (where is Larry Kudlow?)
We assume this is just repricing on the basis that the "deal" was "no deal" and in fact it's clear that Iran sanctions will likely never be lifted - despite the Chinese already negotiating.
Goldman is less sanguine, and in its note released yesterday notes that "implied" storage across various regions is at or over 80% already, and in the case of PADD 2 (excluding Cushing) has already surpassed 100%!
From Goldman:
Our analysis of EIA data suggests that there remains crude spare storage capacity, in the range of 7-21 mb in PADD2 and 42-99 mb in PADD3. While wider domestic crude differentials and weak WTI timespreads are in our view pricing the incentive to shift crude stocks to the US Gulf Coast and even potentially onto floating storage, the uncertainty on spare capacity is high. As a result, while we view the risk of running out of US crude storage capacity as a low probability event, it cannot be ruled out and would likely have a significant price impact given US producers’ low operating costs.
Implied capacity: We take the maximum observed tank farms and refinery stocks at the PADD level between 2008-10 and let this effective capacity proxy grow at the rate of storage capacity expansion reported in the EIA’s semiannual survey. This method points to much lower storage capacity in PADD2 (particularly ex-Cushing) and PADD3, with combined capacity of 49mb currently. It is worth noting, however, that our calculations do not remove crude by rail, so our results may overestimate utilization.
The only loophole is if Oil is either being "stored" underground now (unrealistic):
A large enough contango and low outright crude oil prices create the incentive to not drill or not complete wells, keeping crude oil in the ground. As we discussed previously, a higher deferral rate could lead to a fast decline in US production, although we remain far from shale shut-in economics near $10-15/bbl.
Or barged:
Although the Jones act specifies that “No merchandise […] shall be transported by water […] between points in the United States […] in any other vessel than a [Jones Act] vessel […]”, this does not prevent crude oil from being loaded on non-Jones Act vessels as long as it is loaded and unloaded at the same dock. This is consistent with Ruling H169017 from the US Customs and Border Protection Agency. Therefore, there is the opportunity of using floating storage for US crude, although loading facilities would be a constraint for larger vessels.
Coastal or inland barges could also be used for storage although: (1) capacity is uncertain6, (2) barge economics are expensive, and (3) coastal barges could face hurdles from regulators to store crude near the coast (ruling H169017 applied for storage off the continental shelf). Nonetheless, a wide WTI contango could create an incentive to store crude instead of barging it to Louisiana. In Exhibit 19, we compare the Houston Light Sweet - Louisiana Light Sweet crude differential, net of an indicative $2.50/bbl barge fee from Corpus Christy to the LOOP (and its long-run average), to the WTI contango (a reasonable proxy for the contango of light crude in Houston given set pipeline tariffs). This suggests a greater potential return for using a barge to store rather than ship crude to the LOOP since late February, although we reemphasize the potential variability in barge rates. Interestingly, this would contribute to the recently observed LLS backwardation with fewer inflows as inland barges down the Mississippi to St. James could be used too.
Does the math of floating storage work now? Well, after today's surge probably not, but Goldman thinks it just may... perhaps.



