Monday, March 7, 2016

Crude Oil in Storage is Rapidly Approaching Full Capacity. So Why is the Price Rising?

Something funny is happening with the price of crude oil. Supply is increasing, demand is decreasing, storage capacity is running out, and yet the price is going up.  Up  from $32.84 a barrel on February 26 to $36.33 a week later on March 4.  That's a rise of 10.63% in one week.  Up almost another 5% today. If you are interested in this topic, listen to about 10 minutes of this Macro Voices podcast starting about 41 minutes. Then come back and read on.  If you have the time, the entire podcast is worth a listen as are the other offerings on their website.  It seems that speculators anticipating a rising price have been able to drive the price up based on their will to see it rise.  And foreign oil ministers have cooperated with press releases hinting at impending production cuts or freezes.  The key to the potential collapse of this house of cards may be the rapidly approaching limit on crude oil storage capacity.

For background, let's review some basics of crude oil storage in the US (Crude Inventories and Storage Capacities)
The following graphic describes how crude is stored, where it's stored, and how much capacity exists.  Ignore the actual storage numbers.  They're from Feb 2015 and are out of date.  Just look at capacity.  That hasn't changed much.

  graph of U.S. crude oil storage capacity, as explained in the article text

PADD is an acronym for Petroleum Administration for Defense District.  The country is divided into PADD districts labeled 1-5.  The map above shows the boundaries of the various PADDs and the graph shows the capacity of each. 
As I mentioned, that data too is a bit dated, but close. 

 The narrative on the webpage defines the terminology such as the difference between working capacity and shell capacity, so check out the actual page to read that and get a fuller understanding.  This diagram below is down at the bottom of the page, and it clarifies the terminology even better.

Inline image 3

For current stats on capacity, check this webpage.  As of this writing, November 2015 is the most recently published data on capacity.  March 2016 data will be published at the end of May.  

Here are the current stats on available storage courtesy of the US government Energy Information Administration.  

 Current working capacity is just over 500 million barrels.   Shell capacity about 100 million barrels more.  That extra 100 million barrels is referred to as contingency space, so I'm not sure when or even if that ever comes into play.  And BTW, these capacities are separate from what's known as the Strategic Petroleum Reserve.  That capacity is a further 700 million barrels or so and it it practically maxed out now.

The following 2 charts are representations of current stocks of crude oil relative to overall capacity, and they are more current than the chart at the top of the page.  The first chart is stocks vs capacity for only PADD 3 (Gulf Coast) and Cushing, Oklahoma (part of PADD 2).  Cushing is listed separately because it is important to oil markets as the point of delivery for the WTI futures contract for crude. WTI futures contracts for delivery at Cushing are what determines the price of crude.  Cushing and PADD 3 together make up almost 70% of US commercial storage.  Notice we are currently at 84% capacity for these sites, and Cushing alone is at 89%.

Inline image 2 The next graph shows current stock vs a 5yr range.  Notice that 1)  stocks are way above normal, and 2) crude inventories currently stand in excess of 500 million barrels, which is approaching full capacity.
Inline image 1

Finally, here is an excerpt from the most recent EIA weekly report on crude stocks as of this writing. 
(Click here for most recent report)

The third line is the Strategic Petroleum Reserve which is at capacity, not changing and thus irrelevant.  The relevant line is line 2:  Commercial (Excluding SPR).    The value is 518 million barrels which is a 10.4 million barrel build (2%) from the previous week. 

Summary:  All time high in crude in storage.  Still increasing at significant rate.  Rapidly approaching full capacity.  Now is when the 10 minute part of the podcast comes into play.  Price will only loosely obey supply/demand rules as long as storage is adequate.  Speculation and rumors of production cuts/freezes can have significant influence.  But when storage runs out, price can plummet as that represents suddenly reduced demand.(N0 0ne demands crude if they're not using it and now they can't even store it).

So why in the face of this did oil go up 10% last week alone and a further 5.7% today? 

Looks to me like rude should be headed a lot lower in the future.