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Page added on April 18, 2015
Slight Production Declines Hide Bigger Oil Storage Issues
Storage Builds
Everyone this week focused on the slight production declines that this was a sign to go long oil, but what seemed to go under the radar was another build in both Cushing and the Gulf Coast storage hubs.
Cushing added another 1.3 million barrels to weekly storage and stands at 61.5 million barrels. The Gulf Coast added another 600 thousand barrels to storage and stands at 237 million barrels. By comparison Cushing had 26.8 million barrels in storage this time last year, and the Gulf Coast had 207.2 million barrels in storage a year ago.
Refinery Utilization Rate 92%
This is with refineries operating at 92.3 percent of capacity which is robust and near the top end of this metric. We also have about 17.6 million more barrels of Gasoline in storage versus this time last year, and 17 million more barrels of Distillate stocks in storage this year versus last year.
Artificial Demand
Analysts have pointed out the increased demand for products, and this makes sense given lower prices, but the numbers are inflated because much of the demand is artificial by turning the oil into gasoline and distillates and just storing the products in another form of storage. It isn`t as if demand is so robust that we are lower in product inventories versus this time last year, in fact it is just the opposite.
Imports
The only reason total inventories didn’t have another 10 million build this past week was because imports were down 1.12 million barrels per day versus this same period last year. This would add an additional 7.9 million barrels to last week’s 1.3 million barrels build bringing the total to 9.2 million barrels. So the market got a respite this past week, but with OPEC and Saudi Production at record levels as witnessed by the latest readings, traders may not be able to rely on lower import numbers as the norm going forward into the summer driving season.
Oil Drawdowns
Moreover, despite lower import numbers and the refinery capacity utilization rate above 92% and a slight drop in US Production both Cushing and the Gulf Coast storage hubs both added oil to storage facilities. I am not sure we are out of the storage capacity constraints problem quite just yet! The Midwest corridor which fuels the Gulf Coast Refinery trade for exporting refined products to other countries is still building in storage despite the robust 92% utilization rate. We would expect oil drawdowns in this region given a 92% refinery run rate, so something to pay attention to going forward.
The Race
The race seems to be slight US Production declines (and we mean slight .02) versus rapidly filling storage facilities along the Midwest Corridor. Does it really matter if there are slight production declines but Cushing continues to add to storage facilities, and ramps up against capacity limits?
The “Fundamentals” Don`t Matter in an ‘Electronic Market Place’
Of course none of this matters in the financial markets because anybody that participates regularly in financial markets understands that powerful players who have the ability to move markets will do whatever they want whenever they want until reality forces them to do otherwise, i.e., the fundamentals are so contrary to their market making movements that stronger forces take the other side or they finally throw in the towel and close their substantial positions.
Read >> Another 8 Million Barrels Added to Oil Storage
Right around the April WTI Futures expiration last month in March some players decided they were going to make at least $15 dollars a barrel in Oil, that`s $15,000 per contract, consider WTI routinely trades 400,000 contracts on a daily basis, and you get the picture. This isn`t about oil fundamentals, the electronic oil markets are about one thing making money. And these players deemed they could make more money moving oil up than down in the given time frame. The fundamentals actually deteriorated in the oil storage metrics, Global Production remained at record levels, and China printed a (cough, cough) 7% GDP number.
Speculators
This is part of why oil will stay lower for longer because oil speculators will always keep prices above the fundamentals, this is how we got into the supply glut problem in the first place. Every time there is some slight Middle East disturbance which never affects actual overall supply in the market, or traders are pushing oil up along with equities, or some pipeline needs to be repaired, or the dollar is weak, or the Federal Reserve provides more stimulus, or Goldman puts out a bullish report on oil; prices ramp like no tomorrow. Even though none of these people actually use the commodity, they don`t ever take delivery, they just borrow using carry trades and click some buttons with the goal of making money like a Professional Gambler; all the time being completely divorced from the fundamentals of supply and demand in the marketplace!
US Producers Hang On
So every time speculators push the price up in oil, the producers can just go and hedge future production along the curve, and stay in business another year producing as much as they possibly can crank out into the market. Unfortunately for the OPEC players, getting rid of US Production isn`t as easy as they thought! These small producers just issue more shares, raise cash to fund their debt obligations, wait for an artificial speculative ramp in oil prices, and hedge some more production on the forward curve. Shoot reduce some overhead and costs, renegotiate some contracts, improve drilling efficiencies and there is no telling how long these small Producers can hang in there! This is why speculation in a long-oriented market which oil is by nature because of the synergistic ties to equities, financial markets in general, and oil being a needed commodity will always price ahead of the fundamentals.
Read >> Market Rigged on Daily Basis
The Oil Market should be a “Deliverable Market”
If the oil market was a deliverable market, supply and demand with regard to price in the futures market would be much more aligned, and this oil glut would never have occurred to this degree of market imbalance in the first place. Until price gets to a point and stays at a point for a significant length of time to put producers out of business altogether there will remain a supply and demand imbalance in the oil markets. I am afraid $60 oil isn`t low enough to put any large dent in the global production supply of oil coming to market, if anything it is bringing more supply to market as producers hang on by producing more oil to help mitigate lower prices. Producers need to be put out of business, and I am not just talking about US Shale producers. OPEC, Russia and the Global Oil supply chain got fat and happy on the BRIC Super growth cycle and $100 a barrel oil for a decade. The world just doesn’t need that much oil, China has run up against infrastructure constraints, real-estate bubbles, pollution problems and the law of large numbers – they are no longer building the equivalent of an entire small city every month.
7 Years of overpriced Oil Market
I imagine we will experience spikes in the oil market with lower highs until equilibrium between supply and demand becomes more balanced, but we are nowhere near there yet, speculators are just doing what they do today in the era of modern electronic markets. By my analysis prices have been well above the fundamentals of supply and demand since 2008 and the financial crisis, that`s 7 long years of a poorly priced asset compared with the underlying fundamentals of the commodity. Six months of lower prices isn’t going to fix the market imbalances, and the longer speculators push up the prices of oil on the latest headline, or players want to take a $15 a barrel piece out of the market and add it to their returns, this just prolongs the inevitable. The oil market remains an over supplied market.
Crazy Oil Economics
The five year averages for oil stored just in the US alone have been rising for over a decade, we have almost doubled our amount of oil stored. For example, in February of 2003 we had 270 million barrels in storage; today we have almost 500 million barrels in storage facilities not counting the Strategic Petroleum Reserves. Furthermore, prices were $33 a barrel in February 2003, welcome to the wonderful world of electronic markets. Accordingly in 12 years we have added 214 million barrels to storage facilities, and even after the 50% plus reduction in oil prices, the price of oil is still $24 a barrel higher today!
Efficient Market Hypothesis is a joke
Financial markets really have become complete mockeries of their intended and original purpose. Remember the original goal of the commodities futures market in the days of farmers hedging future production? They are so easily mispriced, and like the oil market can stay poorly priced for over a decade before the market fundamentals force the hand of speculators to adjust money flows. Speculators in the oil market are part of the reason the market is so poorly balanced today, and as long as 99.9% of all oil futures contracts never have to commit to actually taking delivery of the physical commodity, this market imbalance will remain for some time.
19 Comments on "Slight Production Declines Hide Bigger Oil Storage Issues"
JuanP on Sat, 18th Apr 2015 9:33 am
Prices may temporarily fall further if storage is filled, but this people miss the importance of the production declines. These production declines are likely to get bigger every month until at least next year, unless prices increase faster than I expect them to. For as long as oil prices remain where they are, production wil keep declining. The longer the production declines last, the more likely they will be, at least partially, irreversible.
steve on Sat, 18th Apr 2015 9:39 am
I hear you Juan however I see prices increasing….and yes a lot of people won’t be able to afford the high prices and they will be left out…but others will be either printing money or manipulating markets so they can afford it….It is what the U.S has been doing for the last 50 years…they have shown us that they will even kill for it….
shortonoil on Sat, 18th Apr 2015 10:11 am
It takes one barrel of oil to produce one barrel of shale, so when shale production declines by one barrel inventories stay the same. To an economist this observation can not be right! It does not include interest rates, NPV analysis, supply demand curves, or any of the other paraphernalia know to economists. If early economist had been around to prove that according to the “laws” of economics that the sun must be orbiting the earth, Copernicus would have been burnt at the stake. Fortunately, for man kind, and Copernicus they did not make their debut for a few more years.
Here is another economist trying to solve a problem with a screw driver when it really requires a sledge hammer. The whole problem, in their view, is that someone is not following the “laws” of economics: The “Fundamentals” Don’t Matter in an ‘Electronic Market Place’. The evil speculators are not following good sound economic theory. Of course things are all fouled up! Once we get everyone following the correct beliefs, the ones of economists, everything will be just fine!
In the meantime depletion will just keep trucking along. Since that word is not found in text on economics it will never be mentioned. Since depletion couldn’t give two hoots as to what economists believe, it won’t make any difference!
BobInget on Sat, 18th Apr 2015 10:35 am
If oil itself is said to be a finite resource, then ‘storage’ is measurably so.
Davy on Sat, 18th Apr 2015 10:45 am
You boys talking about higher prices fail to incorporate oil into the financial system. You also need to be reminded debt monitarization and rate repression has hit diminishing returns. Markets are at or near a high per the relationship to the debt monitarization and rate repression. The business cycle is nearing the end of what has always been a cycle. Maybe the new normal has eliminated business cycles but I doubt it. Prices might rise in a knee jerk but sustained high prices are highly unlikely.
All this turbulence including the oil supply destruction we are seeing could culminate in a final supply and demand destruction cycle. IOW economic activity is going to begin the process of finding a new level of equilibrium per the end of debt monitarization, normal rate functions, and oil growth (all liquids).
We want to think normal supply and demand will be the reaction. Yet, normal has was left behind after the 08 crisis. We are likely on a bumpy plateau transitioning to a bumpy descent. BAU cannot degrowth without dysfunction and economic abandonment. China is slowing and the west stopped real growth a few years ago. All that is left is manipulations of the global system with wealth transfer polices that can be claimed to be growth. We have cannibalization of the public for private gains to show growth.
This will not last because polies like these have consequences. We are also seeing unintended consequences bubbling up. To top all this happiness off is geo-political instability especially in the ME where the majority of the good conventional oil is located. How any of you can see this as an acceptable situation per growth and progress is beyond me. But, hey, cornucopians are so optimistic anything is possible with their fantasy.
jjhman on Sat, 18th Apr 2015 11:44 am
Could this inventory issue simply be the oil industry looking at healthy demand and seeing the upcoming crash in LTO output?
Putting this simple 2+2 together one could conclude that this cheap oil could become expensive gasoline by the end of the year.
Perk Earl on Sat, 18th Apr 2015 12:44 pm
Would it have been so hard for the Author to research beyond barrels added to storage, the percentages of full capacity? Could have even added pie charts. How about dates of filling up based on current fill rates?
We know from the article storage is being added to, but we are left to guess on many other metrics.
BobInget on Sat, 18th Apr 2015 1:06 pm
Peak Earl taps the barrel perfectly.
Not only is there more crude storage to be had,
much more is being built. (mostly by pipeline companies)
https://www.google.com/search?q=additional+crude+oil+storage+under+construction&espv=2&biw=1006&bih=495&tbm=isch&tbo=u&source=univ&sa=X&ei=rJwyVcXvBc-wogSLlICwCA&ved=0CCUQsAQ&dpr=1.25
rockman on Sat, 18th Apr 2015 2:18 pm
Earl – For Dog’s sake I wish they would focus on something other then this made up “Oh my Dog, we’re running out of storage” bullsh*t. LOL.
Here are the details from the EIA: “Crude oil inventory data for the week ending February 20 show that total utilization of crude oil storage capacity in the United States stands at approximately 60%, compared with 48% at the same time last year.”
IOW we have only 12% more stored oil now then 12 months ago when no one was blubbering about running out of storage. I’ll do the numbers for the math challenged: 100% – 60% = 40% EMPTY STORAGE.
And how much EMPTY STORAGE does that 40% represent?
“From September 2013 to September 2014, total crude oil working storage capacity increased from 502 million barrels to 521 million barrels.”
So again I’ll do the heavy lifting: 521 million bbls X 0.40 = 208 MILLION BBLS OF EMPTY OIL STORAGE. So if 10 million bbls were going into storage weekly(which isn’t happening now) it would take 5 months to fill storage IF THERE WERE ZERO WITHDRAWLS. Of course, with the refineries trying to build summer driving motor fuel inventories (as well as supply all the rest of the refined products they sell in the US and over seas) I would say it’s a good bet the refineries are going to continue pulling oil from storage. After all ever since they started keeping track of the stat there has ALWAYS been a net drawdown from storage that began at this point in the annual cycle.
Nony on Sat, 18th Apr 2015 3:13 pm
The key is not the amount of storage (lot of working capacity needs to be empty) but the market price for that storage. If prices are high, storage is tight. QED. Storage is a competitive market. Lots of tank farms out there.
Oh…and price is up $10 from the low. And contango has lessened. So the glut is getting worked off.
rockman on Sat, 18th Apr 2015 8:14 pm
For those interested in the cost to store oil:
Rough storage costs for a developed country, with a normal inventory turnover representing short term storage:
0.15 $/bbl for a terminal connected by pipeline
0.5 $/bbl for a terminal with marine docking facilities
The costs can very significantly from one terminal to another based on:
– configuration of the facility. Some storage facilities are reconfigured assets that originally served a different purpose, which would make it a higher cost facility to operate.
– economies of scale from high utilization, or not
– local environmental regulations
– local labor costs
– age of the facility
For longer term storage, the primary cost drivers will be:
1) the price of the crude,
2) the cost of capital of the company who owns that crude
For example, at a $50/bbl price and a cost of capital of 8%, the annual storage cost will be $4/bbl, or the monthly storage cost will be $0.33/bbl, in addition to the terminaling costs described at the top of the answer.
And from 10 Feb 2015 the word about storage Cushing:
“The contango scenario has led to a growing demand for onshore and offshore storage facilities. While the current WTI futures for next month delivery are trading at $51.69 per barrel, similar futures for delivery in March 2016 are hovering around $61.63. The $10 gap in spot and future price represents an attractive profit-making opportunity.
Monthly storage costs in Cushing, Oklahoma are below 50 cents per barrel. Storing oil in one of the Cushing facilities would cost less than $6 per barrel on an annual basis, allowing traders to earn a smart return. Cushing has an oil storage capacity of over 70 million barrels, according to US Energy Information Administration. The city holds more than 10% of all the US commercial crude oil inventories.
Many industry experts expect the contango effect to prolong, and perhaps deepen, increasing the amount of oil parked at storage facilities. Presently, there is free capacity to hold nearly 30 million additional barrels at Cushing. Alan Swanson, CFO at Plains All American Pipeline, believes it could be full within a few months. During the last six trading days, his company’s shares have gained almost 7%. Plains All American owns oil tankers at Cushing with a storage capacity of nearly 20 million barrels.
Perk Earl on Sat, 18th Apr 2015 8:34 pm
Yeah, Rock, they keep running these articles but are light on the big picture. Fact is it’s fun stuff to razz people up with hyperbole, but in this case hard to deliver the scary goods. It’s like people use to say on TOD, ‘most people are innumerate’.
Nony on Sat, 18th Apr 2015 10:37 pm
Who cares what it costs in different facilities around the world. The valid comparison is Cushing pre glut and Cushing now.
rockman on Sun, 19th Apr 2015 8:15 am
“The valid comparison is Cushing pre glut and Cushing now.”
Exactly. Which is why there’s been no significant change in storage fees sine the “glut” began. But why would anyone expect there to be? Even today there’s huge amount of unfilled storage (40%) that has no takers. The simple laws of competition set the price. And Cushing specifically: according to the EIA there only 9.8 million bbls more oil there now than in Jan 2013. I don’t recall similar made up hype 2 years ago. BTW that extra 9.8 million bbls of oil “choking” Cushing represents about 13 hours of US consumption.
And for those without access to Google Maps allow me to point out that much of the surge in US oil production has come from the EFS in S Texas. And none of it is going into Cushing for the simple reason that oil, like pigs, doesn’t fly. The pipelines that used to carry oil from the Gulf Coast to Cushing have been reversed and now flow out of Cushing. Likewise there’s little to no oil moving from the Bakken into Cushing. That was one of the goals of the long delayed northern leg of Keystone XL. There had been talk of laying a new line to carry only Bakken production to Cushing but with the drop in oil prices and less Bakken drilling I suspect that proposal is stalled.
And lastly to answer the question: “Who cares what it costs in different facilities around the world?” That would be the folks who see the US as part of the global oil consumption dynamic as opposed to those who might think the US exists in a different reality.
Nony on Sun, 19th Apr 2015 8:47 am
The point is you need to check the same storage price pre and post glut to make an analytical point. Otherwise, it’s just word salad.
http://www.bloomberg.com/news/articles/2015-03-12/oil-storage-squeeze-may-lead-to-another-price-crash
“One of the biggest owners of tanks there is Canadian energy distributor Enbridge. “We don’t have much room left, but we’re still answering the phones,” says Mike Moeller, who manages the company’s Cushing tank farm. “Not everybody who calls is going to get space.” He says monthly lease rates in the spot market have gone from dimes per barrel to more than a dollar in some cases.”
Nony on Sun, 19th Apr 2015 8:52 am
P.s. you STILL haven’t admitted that you made the most basic mistake on the Marcellus. Misreading a monthly change (EIA Drilling Productivity report) to be an annual one. Sure, Marcellus is slowing if you chop it’s growth by a factor of 12!
BobInget on Sun, 19th Apr 2015 1:48 pm
Swiped from another energy related board.
(the thread seems to ‘oversupply’)
Re: bearish case for oil
No doubt drilling efficiencies improve as a play matures, but it’s not linear (improvement decays). People seem to think we are going to improve 30% from here. From what I see, we don’t have much left drilling wise in the Bakken and Eagleford.
The “less efficient” rig mantra is waaaay over blown. I’ve talked to my counterparts in the Bakken and even their crapiest old rig is within a few days performance wise of our most modern one. ROPs are the same, difference is unplanned maintenance.
Completions are definitely an issue if your a bull. Unlike drilling, there is probably some room to go. I don’t think we have found the rollover point where it doesn’t make economic sense to use more proppant.
All that being said, I don’t think the completions performance increase is going to be enough to offset the rig losses. Add to this the fact that companies are delaying the completions. Oh, and why are we still debating this? The data has already starting coming in from multiple sources, and production is dropping. We should be discussing the rate of the drop, the bottom, and what will it take to reverse it.
rockman on Sun, 19th Apr 2015 2:17 pm
So true Bob. The EFS topped out on efficiency gains a year plus ago. And while we might see an improved AVERAGE performance of the shale wells in the future it won’t be due to tech improvements or finding more sweet spots. All drilling projects go thru a rating system. And a major factor obviously is the price of oil/NG. Decrease those prices and the poorer prospects get bumped from the budget. IOW the good news: the drilling programs get a big upgrade. The bad news: there are fewer wells can be justified to drill.
Nony on Sun, 19th Apr 2015 3:02 pm
Rock is correct. The improvement of the average will come from drilling the best prospects (primarily, blabla), not from getting better at E&P. We already saw this in the Bakken in 2008-2009, with the low price then (drilling dropped and IPs jumped).
However, I do think it is interesting to talk about “topping out” on efficiency gains. It implies that there have been improvements. Something different from the whole spiel about nothing has changed and price is the only thing that matters (that sure doesn’t hold up on natural gas).