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The Truth About U.S. Crude Storage

The Truth About U.S. Crude Storage

Despite the popular narrative that we keep hearing, the U.S is not running out of crude oil storage. Yet there are those who are predicting that oil prices are going to fall to $20 or $30 a barrel, pointing to the crude oil storage numbers and suggesting that we are near maximum capacity and therefore a price collapse is imminent. (Although Goldman Sachs did some backpedaling on their forecast this week).

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 let’s dig into the data a bit. Admittedly, if you look at the storage numbers in the nation’s most important oil storage hub (and the price settlement point for West Texas Intermediate on the New York Mercantile Exchange) in Cushing, Oklahoma, it’s easy to form the impression that storage is filling up and an oil price crash is inevitable:

WeeklingCushingStocks

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 (and that’s not even considering that some are storing oil in anticipation of higher prices later this year). Related: Crude Down Following Biggest Weekly Inventory Rise In 14 Years

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 mitigating factors that minimize this possibility.

We are currently 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. Related: No Real Oil Price Relief Until Q3

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:

4WeekAvgSupplied

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:

USCrudeInventories

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.) Related: Could Oil Prices Plummet A Second Time?

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. But it isn’t going to collapse to $20.

By Robert Rapier of Energy Trends Insider

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  • Roland on March 14 2015 said:
    Also, there was an explosion at a refinery in Los Angeles. And many refineries are dealing with a steelworkers' strike. Plus ice on the East coast has delayed tanker unloading there. This has conveniently allowed refineries to increase prices for their product while the price of their input falls.
  • Andy on March 14 2015 said:
    Excellent and informative article. Thanks.
  • JC on March 14 2015 said:
    Unfortunately, truth is usually being suppressed and lies are accepted as gospel.
  • Old data on March 15 2015 said:
    "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"

    The EIA reported 4 says ago that US crude stocks increased 4.5 Mbbl in the week prior, to 448.9Mbbl. How long at that rate?
  • Mr. Miester on March 15 2015 said:
    It's usually at the end of a move, up or down, that the claims about future direction become the most exaggerated and grotesque. Right about now I would expect some talking heads to tell us oil is about to go to zero, due to aliens introducing us to a new energy source.
  • Are Hvalbye on March 16 2015 said:
    So, how are these 521 million of barrels of oil storage capacity defined? How much is actually workable? Commercial stocks? Age/condition? Infrastructure connectivity? Proximity to price settlement hubs?

    Considering the latest week's reported inventory build run-rate (4.5mbd) it will take four months until maximum capacity is reached. However, with crude import at 6-7mb/d one would think that there is a lot of flexibility/slack when it comes to domestic crudes.
  • Ray on March 18 2015 said:
    I think everyone knows the oil industry has historically gone through many ups and downs, mostly due to supply and demand issues. This cycle will not be without its winners and losers. The losers are almost always the smallest producers who cannot afford to hang on. This usually results in a significant increase in abandoned oil wells in need of plugging by states whose revenues were just curtailed from the same down turn. Alas, the environment will take it on the chin.
  • Rick on March 18 2015 said:
    So many assumptions, exclusions and errors in this report.

    1) The Michigan report does indicate the average mpg of new auto purchases has slipped but it is impossible to know if the U.S. auto fleet average mpg has increased or declined without knowing the average mpg of autos that have been retired.

    2) Cushing stocks increased 2.865 mb to 54.403 mb on today's DOE report. Working storage capacity (Crude Tank Farms) in Cushing rated at 70.8 mb (source: EIA as of 9/30/14). At only 1 mb weekly build this storage tops out in 16 weeks (yes, about 4 months). But we're building much more quickly than that. And the report doesn't indicate if this storage is 100% available (although there is likely some additional "surge" storage as Cushing is a major pipeline intersection). Since October 2014 was mentioned above, let's use the week ending October 3, 2014 - Cushing stocks were 18.9 mb. Since then stocks have increased, on average, 1.54 mb/week. And the pace is accelerating. Stocks have built, on average, 2.15 mb/week during calendar 2015.

    3) It would take 4 years to fill 200 mb of storage at a rate of 1 mb per week but our recent pace is much quicker than that. We've average over 7 mb added to total U.S. storage each week since this report was written and we've averaged 4.2 mb/week since October 3, 2014.

    I'm not suggesting storage will completely fill. But crude oil prices began declining in July of 2014 and to this day the rate of production and storage fill has not waned.
  • jim on January 21 2016 said:
    Do you still believe the last sentence of this report?

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