Don’t Drink the Oil Storage Shortage Kool-Aid
There is a narrative that has become popular over the past couple of months. I hear it repeated several times every week. Those who are predicting that oil prices are going to fall to $20 or $30 a barrel point to the crude oil storage numbers, suggesting that we are near maximum capacity and therefore a price collapse is imminent. The argument goes something like this:
US running out of room to store oil; price collapse next?
The U.S. has so much crude that it is running out of places to put it, and that could drive oil and gasoline prices even lower in the coming months. For the past seven weeks, the United States has been producing and importing an average of 1 million more barrels of oil every day than it is consuming. That extra crude is flowing into storage tanks, especially at the country’s main trading hub in Cushing, Oklahoma, pushing U.S. supplies to their highest point in at least 80 years, the Energy Department reported last week.
At first glance, the argument seems to be pretty straightforward. But here at The Energy Letter, we look to dig deeper into the issues for a better understanding of what’s real and what’s exaggerated. Admittedly, if you look at the storage numbers in the nation’s most important oil storage hub in Cushing, Oklahoma, it’s easy to form the impression that an oil price crash is inevitable:
Since early October, crude oil inventories in Cushing have increased each week by an average of 1.4 million barrels (and as noted above, 1 million barrels per week across the entire U.S.). But there is some important context missing from the graphic. Any time someone claims that we are nearly full on crude oil storage, I ask them to quantify that. “Highest levels in 80 years” isn’t quantified. You could be at the highest levels in 80 years and only 10% full. And in the graphic above, one thing that is missing is how much storage volume is actually available at Cushing. The answer is 71 million barrels (with more storage under construction). So even if inventories there continued to build at the recent pace, it would be nearly four months before Cushing would actually be full. But, there are several buts.
But we are also in the season when refinery utilization is lowest. Refiners take equipment offline in fall and spring to do maintenance, so they use less crude oil at this time of year. This maintenance usually peaks in March, and then crude oil demand picks back up as refiners gear up for the summer driving season. The difference in refinery demand between this time of year and summer is generally around a million barrels per day, so even if nothing else changes that storage build should start to flatten.
Further, two other variables are also changing that will impact the storage build. The first is that the budget cuts and cost saving measures that oil drillers are instituting in response to lower prices will start to dampen oil production growth relatively soon. In the Energy Information Administration’s latest Short Term Energy Outlook, the EIA forecasts crude oil production to peak in the second quarter of this year and then decline by 180,000 barrels per day in the third quarter.
Last but not least, demand is picking back up. Automakers have been reporting higher sales of SUVs and pickups as gasoline prices have fallen. In turn, the average fuel economy of the U.S. fleet has recently declined. As a result, seasonal demand for gasoline has risen to its highest level in four years:
These factors will all slow and eventually reverse the buildup of crude oil in Cushing. And of course Cushing isn’t the only place crude oil is stored. The EIA recently reported that across the nation, crude oil inventories are only at 60% of capacity:
The EIA reports that across the U.S., total crude oil working storage capacity was 521 million barrels as of last September, and as of March 6, approximately 320 million barrels of that volume was being used. (While the Weekly Petroleum Status Report currently lists crude oil inventories at 444 million barrels, the EIA states that about 120 million barrels of this is in pipelines, on ships, or oil that is locally stored and has not entered the supply chain.)
If Cushing continues to fill, oil producers will start looking at some of those other areas to store their crude. And with 200 million barrels still available, oil producers could continue to add a million barrels a week for nearly 4 years before crude oil storage is actually full.
So in summary, the narrative being pushed that the U.S. is running out of crude oil storage is false, most likely repeated by those who haven’t bothered to actually check available crude oil storage.
It may also be pushed by those who have a vested interest in seeing oil prices fall, and some who have predicted $20/bbl oil seem to be pushing this notion the hardest. Not going to happen. That isn’t to say that the price is headed back above $80/bbl any time soon. The price is likely to be soft for a while as the inventory build continues. It just isn’t going to collapse to $20.
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