The Tank Is Full And The Bottom’s Not In——-US Crude Inventories At 80 Year High

By NICOLE FRIEDMAN at the Wall Street Journal

In a world awash in crude, oil producers and traders are facing a billion-barrel conundrum: where to put it all.

U.S. crude-oil supplies are at their highest level in more than 80 years, according to data from the Energy Information Administration, equal to nearly 70% of the nation’s storage capacity. A U.S. storage hub in Cushing, Okla., is expected to hit maximum capacity this spring. While estimates are rough, Citigroup Inc. believes European commercial crude storage could be more than 90% full, and inventories in South Korea, South Africa and Japan could be at more than 80% of capacity.

The danger of running out of places to stash crude: Some analysts predict prices, already down 50% since June, could spiral even lower as producers sell oil at a discount to the few remaining buyers with room to store it. Consumers, though, would continue to be big winners as refineries convert an ocean of crude into gasoline and other fuels.

“The inventory levels are actually getting scary,” said Harish Sundaresh, portfolio manager and senior commodity strategist for Loomis, Sayles & Co., which manages about $230 billion. “When I look at storage, it doesn’t seem to me that we have enough.”

Still, relief may eventually be in sight. More storage tanks are being built across the U.S., and some large tanker ships are being leased to house the oil.

When oil supply and demand are roughly in balance, storage depots in tanks and underground salt caverns serve as a place where crude can sit for a few days while a trader finds a buyer.

But producers are pumping nearly 1.5 million barrels a day more crude than the world needs, due to a combination of slowing demand and rising production in the U.S. That means oil put in storage today could be there for years, analysts say. Should the glut worsen, more producers could be forced to shut their wells, effectively storing the oil in the ground.

Mr. Sundaresh and his team, who oversee $5 billion, have bet that oil prices will fall, based on the shortage of storage. On Thursday, oil for April delivery fell 77 cents, or 1.5%, to settle at $50.76 a barrel on the New York Mercantile Exchange.

Storage space is becoming a tradable commodity. CME Group Inc., which owns the Nymex, plans on March 29 to launch the first oil-storage futures contract. The contract will allow traders and producers to buy and sell the right to store certain types of oil in Lafourche Parish, La., for a specific month.

Since 2009, the last time inventories were high, a boom in tank construction has added tens of millions of barrels to U.S. storage capacity. Still, that is filling up fast.

Outside the town of Cushing in central Oklahoma, Mark Hurley is the gatekeeper to neat rows of crude-oil storage tanks.

The tanks, which can hold a combined 6.6 million barrels of crude—enough to fill more than 400 Olympic-size swimming pools—are all fully leased through the end of the year.

“We get a lot of incoming calls these days to see if we have any available storage,” said Mr. Hurley, chief executive of Blueknight Energy Partners LP, a jointly held unit of Vitol Holding BV and Charlesbank Capital Partners. Mr. Hurley has a short answer for all callers: No.

Fairway Energy Partners LLC is planning to use five underground salt caverns, located 2 miles south of NRG Stadium in Houston, to store nearly 19 million barrels of crude oil by the end of 2016. Caverns, which are created by using water to dissolve the salt in naturally occurring salt domes, are well-suited to storing crude or natural gas because their salt walls are impermeable.

Most of the oil processed in Houston used to be imported on ships, which could be turned away when supplies became too large. But today, Houston refineries get much of their oil from domestic producers in Texas, North Dakota and Canada. Because most U.S. crude can’t be exported by federal law, domestic producers have fewer markets to sell their oil.

“Talking to a lot of the customers that we’re talking to, they’re starting to see the marketplace fill up,” said Fairway Chief Executive Christopher Hilgert.

Many traders see Cushing as ground zero for the global oil glut. The city is the hub for pipelines connecting oil fields in Canada and west Texas to refineries along the Gulf Coast and is the nation’s biggest commercial storage hub by capacity. It is also a popular spot to store oil because it is the delivery point for the barrels backing futures traded on Nymex. Because of a current quirk in the market—futures prices for later months are higher than the front-month contract—traders who store oil in Cushing can lock in an agreement to sell that crude at a higher price.

“It’s free money,” said Brian Busch, director of oil markets at Genscape Inc., a data provider that tracks storage levels in Cushing. “There’s absolutely nothing that can stop” Cushing facilities from filling to capacity.

Stored supplies at Cushing rose to 49.2 million barrels in the week ended Feb. 27, according to the EIA. Inventories there rose by 7.8 million barrels in four weeks; at that rate, the usable capacity in the area would be maxed out by May.

Storage operators, including Plains All American Pipeline LP and Phillips 66 , have said recently that they expect the tanks in Cushing to hit capacity. At that point, most of the world’s remaining available storage would sit in tanks along the U.S. Gulf Coast or in ships.

Among industrialized nations, commercial oil and petroleum-product stockpiles could hit an all-time high of 2.83 billion barrels by midyear, the International Energy Agency warned last month. The last time they were at that level, in August 1998, oil prices averaged $13.38 a barrel, equivalent to $19.18 a barrel today.

Oil Glut Sparks Latest Dilemma: Where to Put It All – WSJ.