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Page added on February 11, 2015
Why rig cuts won’t save oil
The sharp drop in U.S. oil rig counts has helped lift crude prices off their lows, but it won’t slow production or alleviate oversupply, Goldman Sachs said.
“The decline in the U.S. rig count likely remains well short of the level required to slow U.S. shale oil production to levels consistent with a balanced global market,” Goldman said in a note Tuesday. “Lower oil prices will be required over the coming quarters to see the U.S. production growth slowdown materialize.”
It estimates the current rig count will bring production growth from the Big-three shale basins — Permian, Eagle Ford and Bakken — to 615,000 barrels a day in the fourth quarter of this year, while continued productivity growth may push that as high as 690,000 barrels a day.
Which, not how many
It’s about which rigs are getting cut. U.S. crude production was estimated at around 8.6 million barrels a day in 2014, according to data from the International Energy Agency.
“High-grading,” with producers eliminating the least efficient rigs first, will also keep production humming along, it said, estimating the Big-three plays would need to cut their horizontal rig count by another 30 percent to 407 by the fourth quarter to bring production growth to 400,000 barrels a day by then.
Additionally, the rig-count drop may be concentrated in non-contracted rigs, Goldman noted. That’s a cost-cutting play, as it can allow producers to negotiate lower rates, it said.
“While this focus on cost reduction initially leads to a sharp drop in the rig count, it provides little information on the future path of the rig count and companies’ aim at high-grading,” it said. Once price negotiations are done, those rigs could quickly come back on line, it said.
Productivity
Productivity gains are another likely wildcard suggesting the rig-count decline won’t dampen supply much, Goldman said.
“The impact of productivity gains is likely to be most visible over a longer period of time as it compounds on itself,” Goldman said, with the possibility it’s more likely to be felt in 2016 than this year.
In January, Goldman cut its oil price forecasts sharply.
On a three-, six- and 12-month basis, Goldman forecasts Brent at $42, $43 and $70 a barrel, respectively, with WTI at $41, $39 and $65 a barrel.
39 Comments on "Why rig cuts won’t save oil"
Davy on Wed, 11th Feb 2015 6:50 am
CNBC, will not face the reality of the bumpy plateau let along the entry into the bumpy descent. A big reason for this is they will not digest the facts of a foundational commodity of oil in declining economic energy. They will not acknowledge the profound link between energy and real GDP. We are talking the corns like Marm that live and die on Fred charts. We are not talking central bank and Wall Street produced GDP we are talking real bread and butter GDP.
The real economy has not recovered from 08 nor will it ever recover. The real economy has been damage since the days the 1% began their policies of comparative advantage and globalization which is nothing more than global yield seek. The public and been sacrificed for the private individual gain. Wealth transfer, cannibalization of the productive class, multiple bubbles, and a grand Ponzi scheme of debt are what is coalescing currently.
If one gets a handle on POD & ETP of oil along with this grand Ponzi scheme then throws in limits of growth with diminishing returns we see descent. This flip side of descent is related to population overshoot, carrying capacity breaches, AGW instability, and ecosystem degradation. If these basics of the foundation are not acknowledge then these CNBC folks see nothing but the endless cycle of growth of a faux exceptional man substituting and marketing his way into a boundless growth regime. Technology, knowledge, and innovative progress has no limits to these folks.
If CNBC truly had an understanding of the foundational issues for our macro ecosystem and our human sub ecosystem then they would see clear examples of descent and disequilibrium. We are in stable disequilibrium currently with confidence maintenance at the top by central banks backed up by police states. Peak resources are there and parasitic growth of the many by the few is still possible so this charade may carry on.
The time line for bifurcation which must happen because our foundational energy source is clearly in decline, is near but not quantifiable. In the meantime demand and supply destruction is at work in the economy and most fully in the relationship between energy and GDP. Systematic destruction is an ever present danger but the brick wall of collapse is our foundational commodity oil.
Makati1 on Wed, 11th Feb 2015 6:59 am
Gotta keep pumping to keep bankruptcy away, even at $20/bbl if it happens. This is the end of the fraking bubble, I think. One million more unemployed by the end of the year? We shall see.
rockman on Wed, 11th Feb 2015 7:15 am
One more ass clown who is either being intentional deceptive or who truly understand very little about the oil patch.
“The sharp drop in U.S. oil rig counts has helped lift crude prices off their lows, but it won’t slow production or alleviate oversupply, Goldman Sachs said.” The drop in rig count has had ZERO effect on new production coming on line because of the lag time between when a rig finished drilling a well and it begins producing. That can easily be a couple of months to 6+ months. And then there’s the lag time in production data being sent out by the companies that specialize in the process. The Rockman uses Drilling Info. Today the most recent production data for Texas on this pay site is Nov 2014.
So it’s simple: the amount of new production, such as from the Eagle Ford Shale, will continue to grow because there was very little change in the number of rigs drilling it THE LAST HALF OF 2014. Many of those wells are still waiting to go on line. And when they do start producing we won’t see the numbers reported for until spring of 2015. However much the rig count drops with a subsequent decrease in new shale production won’t be evident in the data until next summer. And that would just be a hint of what trend might be developing. The full impact of lower oil prices on US oil production (and not the futures price) won’t be obvious until the end of 2015.
“The decline in the U.S. rig count likely remains well short of the level required to slow U.S. shale oil production to levels consistent with a balanced global market,” No one, including the almighty Rockman, knows how low the rig count will fall. But the Rockman talks to service company reps daily. Reps who talk to all the EFS players on a daily basis. And all those service companies are making drastic cuts in personnel based upon their conversations with the shale players. And no one here has ever heard of 95% of those companies. Yes: Baker, Halliburton, Schlumberger and other big brand names are cutting hands. But those numbers are nothing compared to the cumulative cuts by thousands of small service companies. They are not only cutting 30% to 90% of their staff but are shutting down entire shops in Texas. Two weeks ago I used one service company on a well that had 37 hands working for it a month earlier. When I used them that number had been reduced to ONE.
As mentioned above the rig count might have fallen but there’s a backlog of wells waiting to be frac’d and brought on line. IOW the frac companies are just as busy now as they were 6 months ago. But six months from now it will be a very different story. It’s very unfortunate the MSM and all the other talking heads try so hard to satisfy the 24-hour news cycle. The oil patch doesn’t adjust anywhere close to that time frame.
shortonoil on Wed, 11th Feb 2015 7:39 am
Productivity gains are another likely wildcard suggesting the rig-count decline won’t dampen supply much, Goldman said.
ZH doesn’t call GS the Muppet fleecers for nothing! According to them, a drop in rig count is not going to affect production increases, and the price is going to go up:
On a three-, six- and 12-month basis, Goldman forecasts Brent at $42, $43 and $70 a barrel, respectively, with WTI at $41, $39 and $65 a barrel.
No doubt about it, increasing the inventory of paint thinner is going to make prices skyrocket??? In actuality, there is a backlog of wells that have been drilled but not yet completed. Production will stay fairly constant until that backlog has been used. It will then crash, and shale stocks with it.
But production is going up, and prices are going up. GS says so. Run out and buy, buy, buy shale. That will make it easier for GS to short, short, short. The few $100 million Ham’s ex left him is now about to be donated to another charitable institution. The save the “blood sucking squid” fund!
http://www.thehillsgroup.org/
shortonoil on Wed, 11th Feb 2015 8:01 am
But six months from now it will be a very different story. It’s very unfortunate the MSM and all the other talking heads try so hard to satisfy the 24-hour news cycle. The oil patch doesn’t adjust anywhere close to that time frame.
The CAT people are telling us that you can’t give away a hydraulic excavator, or a D6 in North Dakota. That was one of the hottest markets in the world a year ago. There is going to be plenty of cheap iron hitting the market pretty soon. When the strip miners died they sold all that stuff to South America. Wonder who is going to get it this time, or is it just going to sit in a somewhere, and rust?
http://www.thehillsgroup.org/
platinumshore on Wed, 11th Feb 2015 8:09 am
Predict a major price bounce myself once the energy forecasters start using netenergy weighted forecasts – like everything else financial today, accept energy.
rockman on Wed, 11th Feb 2015 8:22 am
shorty – Going to my wells in S Texas I often pass a big CAT plant. There’s a storage yard right on the highway with lots of big yellow machines sitting there that haven’t moved for a long time.
JuanP on Wed, 11th Feb 2015 8:34 am
I call this kind of thinking, mental masturbation. These fools are in for some surprises. I am not an expert, but there is no way this stuff makes sense. I will let the experts keep beating this sucker, he asked for it.
Plantagenet on Wed, 11th Feb 2015 8:39 am
People who this oil glut is the end of fracking are engaging in magical thinking. As Goldman Sachs points out above oil production from fracking is likely to go UP not down in the coming year, in spite of the oil price collapse
shallow sand on Wed, 11th Feb 2015 8:48 am
Thanks for confirming what I thought about this article ROCKMAN. I know my area is a speck of sand in the beach of US production, but I will say the yards are full of equipment, every service co has laid off help and cut others hours and this week saw the first foreclosure notice in the paper re a small operators leases wherein the loan secured thereby is in default.
Looked at our co ten year p/l history last night. From 1/2005 to 12/2014 looks like average price for WTI was $81 and change.
I’m actually not as worried as I was a few weeks ago. I think adjusting is the toughest thing. I actually have went from scared to hoping for the price to hover around here long enough to pick up some more production at much lower per bbl price. Call me crazy.
Plantagenet on Wed, 11th Feb 2015 8:52 am
Interesting to see that the rock man also agrees shale oil production will rise slightly in 2015 in spite of the oil glut
Davy on Wed, 11th Feb 2015 9:07 am
Planter you are using magical thinking if you think you know shale production will rise. The entire oil industry is economically dependent and no one here or anywhere for that matter knows the ins and out of that grand game. We as mere mortals can only project trends and possibilities.
My possibility is the end of growth in a bumpy descent of demand and supply destruction complete with volatility and irrational trends. This will correspond to the random acts of chaos in a system complete with dysfunction, economic abandonment, and irrational policies. All this with the backdrop of population overshoot, AGW, geopolitical tensions, and ecological failures. Planter, what in the above is optimistic?
I hope you are right and the corns prove me wrong at least for 10 years. I see no hope beyond 10years. At my age 10 years is a gold mine of life.
marmico on Wed, 11th Feb 2015 9:13 am
No doubt about it, increasing the inventory of paint thinner is going to make prices skyrocket???
Ya, as if ~40% of oil is consumed [2.05/5.44] in the refinery (processing) process to make product in the ETP model. Look at refinery inputs/A>.
The full impact of lower oil prices on US oil production (and not the futures price) won’t be obvious until the end of 2015.
The investment bankers employ replicable production models, you employ POD, which means whatever you want it to mean.
Podunk residents like quart shy and Rockman make shit up on the fly to curry favor with the nutter tribe.
forbin on Wed, 11th Feb 2015 10:01 am
well marmico , paint thinners is more expensive over this side of the pond so I guess a greater inventory of it would lower prices , unless they can make petrol ( gasoline) out of it .
apparently the LTO from shale is good for that as well .
I have always suspect that the return of LTO is better than the Hills Group make out ( I understand the arguement) as the infrastructure was available. Its also why I suspect its only USA that has exploited it , little has happened elsewhere in the world from what I’ve read.
As for peak oil ? its just a mathimatical point in time for a finite resource . changing definitions of oil just moves the point in time , nothing more , nothing less
Even MiniTru ( BBC) is covering the Reserves Depletion issue
“http://www.bbc.co.uk/news/uk-scotland-31169878”
Bumpy and bumpy down I say
Forbin
marmico on Wed, 11th Feb 2015 10:32 am
Bumpy and bumpy down I say
Forbin
No doubt that you have been repeating that mantra for 10 years notwithstanding evidence to the contrary.
So global oil production is ~77.5 mb/d in 2015. I believe that it will be 80 mb/d in 2020 and U.S nominal gasoline prices will be $3 per gallon. You believe that it will be 75 mb/d, $6 a gallon and the apocalypse is nigh, if not in full grandeur.
In the interim, I’m enjoying the lard being excised from the (formerly) smug U.S. oil patch who has not experienced a competitive market in eons, while I pay the lowest real gasoline price per mile travelled in decades. 🙂
shallowsand on Wed, 11th Feb 2015 10:51 am
Marm, of course there is a lag time before US production will begin to fall. Rig count drop just started 3-4 months ago. Heck, this GS guy may be right on the money, he may not. Even he does not know.
So you think the things GS says in public are correct? Were they not calling for $150 less than a year ago?
These guys number one goal is to talk things up or down depending on what will make them the most $$. I do know one thing, they were not calling for sub $50 WTI in the spring of last year.
Really difficult to know timing, but US production is going to fall if the rig count keeps falling off a cliff. I’m pretty dumb, but even I know that.
Its early, but right now it looks like we will be able to wait this thing out. I hate to see so many good workers get canned. However, I will be more concerned if they keep on drilling and completing a large number of shale wells as the price continues to stay in this ballpark or drop further. Right now, it looks like that will not happen, assuming the large companies stick to their guidance.
Marm, unless you believe shortonoil’s thesis, which I am sure you do not, you should be looking for some oil and gas investments. Buy low, sell high, correct?
One thing, why do you rip on us hicks being hicks? I have not experienced that since my days at the State U many, many years ago. My experience has been the city dwellers are not any smarter, they just think they are.
Davy on Wed, 11th Feb 2015 10:55 am
Shallow, a Marm is tough as nails on the surface but mush on the inside. My 1st wife was like that.
BTW, good comment Shallow.
marmico on Wed, 11th Feb 2015 11:03 am
The Goldman Sachs High Grading LTO Model.
I only associated high grading with mineral extraction. Gold prices are high so you scoop more tons from the low bearing mineral pay zone and less tons from the high bearing mineral pay zone for delivery at the mill mouth.
Never thought of that in the oil biz LTO pay zones, did you shallow sand?
bobinget on Wed, 11th Feb 2015 11:09 am
I’m having a tough time putting today’s Congressional “War Resolution” out of my head.
It should be named ‘Continuous Oil War Resolution’
“Any individual, group or nation that fucks with US
oil supplies will be properly disciplined.”
This of course puts China and Russia in a precarious, rather awkward positions.
When and if Venezuela manages to sell CITGO’s three US refineries and hundreds of fast food outlets, we will see, or more to the point, Not See Venezuelan crude imported, certainly not almost one million barrels p/d. we buy today. Who do we blame?
How many Bakken wells does it take to produce one million BB p/d? Let’s find out.
http://www.eia.gov/petroleum/drilling/#tabs-summary-2
Thousands of barrels
Bakken 1,303 1,316 (Feb & March 2015)
Eagle Ford 1,716 1,733
Now, let’s look at the output for a single deep water well in the GOM
http://www.offshore-mag.com/articles/print/volume-58/issue-8/news/production/managing-high-well-productivity-in-the-gulf-of-mexico.html
“The best well was reported to be producing around 46,000 b/d. In the Gulf of Mexico, the Troika field set the Gulf record for a producing well at 30,000 b/d.”
Add up every tight oil production well in the US today. http://www.eia.gov/petroleum/drilling/
In Canada its drinks all round when a well comes in
over 600 B p/d.
marmico on Wed, 11th Feb 2015 11:56 am
One thing, why do you rip on us hicks being hicks?
My apologies shallow sand, I missed that statement in your prior post. I don’t think that you are a hick based on our previous intersections. You are a guy trying to make a buck in the oil business. All the success to you. But your Podunk Buddy Rockman stated upfront:
“One more ass clown who is either being intentional deceptive or who truly understand very little about the oil patch.”
It is in your best interest to separate yourself from Podunks like Rockman. Goldman Sachs knows nothing about models, sensitivity analysis and central tendencies, only the Rockman’s POD does. ROTFLMAO.
forbin on Wed, 11th Feb 2015 12:24 pm
“No doubt that you have been repeating that mantra for 10 years notwithstanding evidence to the contrary.”
correcton marmico, no I haven’t
And as we still measure oil ( C+C) production as either a plateau or slightly up depending on who you believe I’d posit that the “bumpy down” has yet to materialize
Admitted the down side will be of great interest to all ….
Forbin
Davy on Wed, 11th Feb 2015 12:53 pm
Marm lumps all PO discussion as nutter talk not realizing the wide variety of views. He also fails to acknowledge how far the subject has progressed and now is mainstream. The mainstream media is obsessed with disproving the concept similar to climate change deniers.
How can one argue against science. The arguments are primarily profit driven. If PO was a profitable subject these MSM folks would be all over it talking it up with their faux experts.
shallowsand on Wed, 11th Feb 2015 1:10 pm
Ok Marm. I would say deep down GS knows what is going on, they have made the $$ to prove it. However, they are not going to let out what info they know in a sound bite. Instead they are going to “talk their book” as they say. They probably have some action in the 20s or 30s WTI right now, 4-7/15.
I do not think GS can be underestimated. After all, they have the “Uncle Sam” put. Allows for bigger risk taking, IMO. I would take much larger risks if I had unlimited “bridge” financing during a bad period.
Just don’t think you need to be so harsh on people, but you can slam me all you want because it really does not bother me.
I still think you are somehow connected to shipping or transport, because you are too happy about low fuel prices, like my friends in that business who are giving me crap right now. What goes up comes down, etc. They are kicking butt right now, except for the one who hedged a lot of diesel at higher prices. Too bad for him.
marmico on Wed, 11th Feb 2015 1:11 pm
The mainstream media is obsessed with disproving the concept similar to climate change deniers.
Whatever, Davy-boy.
shortonoil on Wed, 11th Feb 2015 1:15 pm
paint thinners is more expensive over this side of the pond so I guess a greater inventory of it would lower prices , unless they can make petrol ( gasoline) out of it .
apparently the LTO from shale is good for that as well .
As per RBN Energy, 1.2 mb/d of LTO has an API over 50. Our estimate is 1.4. Using that 1.2 mb/d figure 37% of LTO won’t produce any kind of transportation fuel. It is strictly feedstock material:
http://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/energy/images/eneene/sources/petpet/images/refraf1-lrgr-eng.png
From an energy perspective, it takes as much energy (probably more) to extract LTO as it does conventional crude. But, 37% of it never takes part in the energy production process (it has to be used in a combustion process to get energy out of it). If 37% of conventional crude was removed from the process stream that would leave an energy content of 88,200 BTU/gal; something just slightly better than ethanol.
The shale industry has gone out of its way to obfuscate the true merit of LTO. Some simple calculations prove otherwise. This stuff has done nothing to drive the economy except produce a credit crisis for the petroleum industry. Laharrere was correct when he stated that the US would have been better off if it had never got involved in the shale industry!
http://www.thehillsgroup.org/
marmico on Wed, 11th Feb 2015 1:54 pm
It’s real simple, shallow sand. My preference is the lowest price for a gallon of gasoline, a head of lettuce, a new pair of jeans or a hotel room at the Hyatt for the 2016 Sugar Bowl. Your preference is the highest gasoline price. Screw your preference.
Davy on Wed, 11th Feb 2015 1:59 pm
Marm, I pay the higher price generally looking for value. You must shop at Walmart and tip shitty. But you are damn good with the numbers that’s why I like you.
ghung on Wed, 11th Feb 2015 2:00 pm
“…My preference is the lowest price for a gallon of gasoline, a head of lettuce, a new pair of jeans or a hotel room at the Hyatt for the 2016 Sugar Bowl…”
Spoken like a true consumer. Seems the MSM and economists have you pegged.
tahoe1780 on Wed, 11th Feb 2015 2:44 pm
Short, can you provide detail on the processing number? Seems way high.
“Here is the 2012 energy breakdown for the “average” barrel:
“Extraction………618,870 BTU/barrel
Processing…….2,053,800
Distribution…….267,330
Total……………..2,940,000
The energy content (exergy) of 37.5 deg. crude is 5.88 million BTU/barrel:”
rockman on Wed, 11th Feb 2015 2:50 pm
“Interesting to see that the rock man also agrees shale oil production will rise slightly in 2015 in spite of the oil glut” It’s as I’ve pointed many times companies will ignore sunk costs and carry on with a shale well completion regardless of the price of oil. Same thing with production rates: very few operators will reduce the flow rate of a well even if selling at the prevailing prices doesn’t recover 100% if their investment. But drilling a new well at current prices? That’s a very different decision making process.
Same reason the KSA doesn’t want to reduce their production rate: even at the lower price they are still generating a huge cash. A cash flow they need to keep the natives content and peaceful. Profitability is not a high priority for them
Plantagenet on Wed, 11th Feb 2015 3:02 pm
Exactly right rockman. We’ll either need more demand to sop up the surplus oil or a significant drop in production to end the oil glut
apneaman on Wed, 11th Feb 2015 3:30 pm
I’ll go with Tom Lewis over anything that the lying den of thieves at Goldman shits out.
Oil Prices: A Simple Explanation
By Tom Lewis | February 11, 2015 | Energy
http://www.dailyimpact.net/2015/02/11/oil-prices-a-simple-explanation/
shortonoil on Wed, 11th Feb 2015 4:09 pm
Short, can you provide detail on the processing number? Seems way high.
Processing…….2,053,800
That number came from a 2010 EIA published report. Who actually did the study I don’t known (probably U.T. at Austin). Their determination was that it took 16,300 BTU/$ of finished product, which was increasing by 300 BTU/$ per decade. We calculated the 2012 weighted wholesale price of petroleum products, and came up with an average of $3.03 $/gal. We used $3.00/gal * 16,300* 42 to get 2,053,800 BTU/barrel. This value, along with others, like the price correlation was used to test the model.
The output of the Etp Model for 2012 is a little different:
Extraction……..609,000 BTU/barrel
Processing……2,101,848
Distribution……267,330
Total………….2,978,178 BTU/barrel
or a difference of 1.3%, which is well within the 4.5% margin of error of our study.
The Etp Model, being a thermodynamic analysis, should be expected to produce somewhat different results than a strict empirical study. The empirical studies are, however, important for model verification. We are lucky that organization like the EIA has been able to supply us with many good studies to test against. The EIA, and U. Texas has certainly been worth the tax payers dollars that have been invested into them.
http://www.thehillsgroup.org/
tahoe1780 on Wed, 11th Feb 2015 5:31 pm
Short – Thank you
dubya on Wed, 11th Feb 2015 7:24 pm
You know there is an oil glut. It’s obama’s fault, the oil glut. The oil glut may end soon, but that will be because obama’s incompetent. Oil glut. I just bought 200 l
of farm diesel to alleviate the oil glut.
fred1 on Thu, 12th Feb 2015 7:05 am
f!@k yeah short nails it every time!
tahoe1780 on Thu, 12th Feb 2015 12:51 pm
Short – I ran the numbers by a friend in the business and he responded as follows:
“The number reported by EIA was in BTUs per $ of product. Problem is how to compute the value of the products and whether both sources used the same number. The $3 used by the author is suspiciously similar to the price of gasoline today, which is probably appropriate for half of the refined content (roughly half of each refined barrel ends up as transportation fuels), but the $3 price on the market includes a substantial amount in federal/state taxes and profits of the oil companies and retailers. I doubt EIA based their calculations on that number. It would seem more appropriate to use the aggregate wholesale price of refined products. The comment also says the energy used for processing was rising at 300BTU/$ each decade or less than 2% per decade (300/16,300). That’s pretty negligible over the past 30 years, only 900BTU/$. Yet the first post shows the energy necessary to extract, process and distribute has gone from 931,500 BTU/$ in 1980 to 2,940,000 BTU/$ in 2012 or an increase of nearly 2,000,000. If processing only accounts for 900 of the increase, it’s impossible to get a total of 1,999,100 from the other components of extraction and distribution. Something must be wrong in the numbers.”
What are we missing?
Davy on Thu, 12th Feb 2015 2:27 pm
Tahoe, I am curious how short responds. In any case I am sold on the concept even if his numbers are weighted for effect.
bobinget on Thu, 12th Feb 2015 5:57 pm
http://www.reuters.com/article/2015/01/12/us-oil-tanks-analysis-idUSKBN0KL0AZ20150112
(Reuters) – The U.S. oil storage trade is back – and may be bigger than ever.
Six years ago, the financial crisis led to a sudden surplus of oil and a collapse in prices, spurring a classic low-risk trade that’s set to make a comeback: buying crude to store in onshore tanks or floating tankers, since oil costs $8 a barrel less now than what futures buyers will pay in a year.
OPEC’s decision not to cut output in the face of slower demand and growing U.S. shale has traders scrambling to cash in on the return of a market structure known as ‘contango,’ by securing storage that could yield an almost guaranteed return of 8 percent or more.
This year, they’ll have more scope than ever before to take advantage of the contango play: the capacity of U.S. commercial oil storage tanks has expanded by a third since 2010, while months of strong demand for domestic crude from North American refiners has prevented inventories from swelling too far.
As a result, those onshore tanks are barely a third full, with less than 150 million barrels of the nation’s total 439 million barrels of shell storage capacity occupied as recently as October, according to a Reuters analysis of U.S. data. That’s by far the highest vacancy rate since the Energy Information Administration began a bi-annual survey of tank farm capacity — which exclude refinery stocks and oil in pipelines – in 2010.
Since September, U.S. commercial stocks have risen by about 22 million barrels. Assuming all of that fed into tank farms, rather than refineries or pipelines, whose inventory levels generally don’t fluctuate much, more than half of the nation’s tanks still stand empty, the data show.
The historically large volume of empty tank space may also herald a pause, if not an end, to an unrelenting rout in global markets, as traders embark on a sustained campaign to buy physical crude to stockpile, analysts said — at least until stocks rise so high that space once again becomes scarce.
“We’re at an inflection point” in the oil market, said Philip K. Verleger, an energy economist who has closely tracked oil storage economics for three decades. “Prices can stay at these levels as storage fills. But if demand doesn’t pick up or supply go down, then prices will fall again.”
The figures may surprise traders who have been thus far focused on the atypical build in stockpiles this winter, with inventories reaching record seasonal highs at a time when they normally decline due to heating demand and year-end tax issues.
RACE IS ON
For traders in the opaque physical market for U.S. crude, the race for access to storage is already on.
“It’s a great bet,” said one physical trader with a merchant who was trying to secure storage space in Cushing.
Among the biggest beneficiaries are likely to be big trading houses like Vitol and Mercuria, as well as some midstream firms like Plains All American, who can buy extra crude to fill up storage tanks that they already own. Others will be trying to lease more, likely driving up rates to the benefit of big owners such as Canada’s Enbridge Inc, Magellan Midstream and NuStar Energy.
Almost 40 percent of total tank farm capacity was leased to third parties as of last September, up from a low of just 28 percent in 2012, the data show.
The rush emerges after the collapse in global oil prices since June takes a heavier toll on the prompt prices than those in the future, creating a large enough contango in the market to pay for the cost of storage and finance.
The U.S. futures market first flipped into contango in November. By Friday, the February 2016 oil contract was trading at a premium of more than $8 a barrel to the first-month Feb 2015, the widest spread since early 2011 but not yet as alluring as the $25 gap at the height of the financial crisis.
At that time, the annualized financial return from storing a barrel of U.S. physical crude reached 40 to 50 percent, according to estimates by Verleger. Now the return is around 8.5 percent.
Returns are already somewhat higher for North Sea Brent, fuelling demand to charter oil supertankers to use as floating storage due to the relatively limited availability of onshore commercial storage in Europe.
CUSHING LURES
The extra space is also the result of a multibillion dollar build-out of the nation’s oil infrastructure over the past five years, as a near doubling in domestic production and a reversal in the flow of crude create new storage demand in new places.
Since September 2010, shell storage capacity at tank farms has expanded by 32 percent or more than 100 million barrels, the EIA data show. Capacity in Canada has also risen.
The scramble for storage will be especially fierce at Cushing, the world’s largest commercial tank hub and a prime location for storage plays as the delivery point for U.S. oil futures, where only about 40 percent of 80 million barrels is now occupied, well below normal levels. By early 2009, after a similar rout, Cushing was already about three-quarters full.
The situation is similar well beyond Cushing, according to Genscape, an industry intelligence group that monitors oil facilities including tank farms in Canada, near Houston and in and around the Permian Basin oil patch.
Some 86 million barrels of crude is now held in stocks at those 10 locations, only about half the total capacity at those sites and a decline from peaks in recent months. In the Permian, utilization is 34 percent, the lowest since Genscape began monitoring it in 2010.
The lower utilization rates on the Gulf Coast are “a fixture of the storage economics in Cushing – everyone is storing barrels at Cushing because they’ve got space to put it and the storage rates are cheaper,” said Hillary Stevenson from Genscape.
(Reporting by Jonathan Leff; additional reporting by Catherine Ngai, editing by John Pickering)