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It was just last week when we said that Cushing may be about to overflow in the face of an acute crude oil supply glut.

“Even the highly adaptive US storage system appears to be reaching its limits,” we wrote, before plotting Cushing capacity versus inventory levels. We also took a look at the EIA’s latest take on the subject and showed you the following chart which depicts how much higher inventory levels are today versus their five-year averages.

And now with major US refiners dumping crude, as we detailed overnight, those fears are surging.

U.S. Energy Information Administration data on Wednesday showed inventories at the Cushing, Oklahoma delivery hub hit a record 64.7 million barrels last week – just 8 million barrels shy of its theoretical limit – stoking concerns that tanks may overflow in coming weeks.

And now, given the “super-contango” in 3-month it is extremely clear that storage concerns are at their highest in 5 years…

Simply put, as one trader noted, speculators are now “making the leap to Cushing storage never being more full… will actually overfill, or even stop taking crude oil deliveries outright.”

It was just last week when we said that Cushing may be about to overflow in the face of an acute crude oil supply glut.

…click on the above link to read the rest of the article…

BP’s Stunning Warning: “Every Oil Storage Tank Will Be Full In A Few Months”

February 10, 2016

BP’s Stunning Warning: “Every Oil Storage Tank Will Be Full In A Few Months”

It was just last week when we said that Cushing may be about to overflow in the face of an acute crude oil supply glut.

“Even the highly adaptive US storage system appears to be reaching its limits,” we wrote, before plotting Cushing capacity versus inventory levels. We also took a look at the EIA’s latest take on the subject and showed you the following chart which depicts how much higher inventory levels are today versus their five-year averages.

graph of difference in inventory levels as of January 22, 2016 to previous 5-year average, as explained in the article text

Finally, we went on to present two alarm bells that offer the best evidence yet that inventories are reaching nosebleed levels: 1) some counterparties are experiencing delays in delivering crude due to unspecified “terminalling and pump” issues (basically, it’s hard to move barrels around at this point because there’s so much oil sitting in storage); 2) the cash roll is negative.

On Wednesday, BP CEO Robert Dudley – who earlier this month reported the worst annual loss in company history – is out warning that storage tanks will be completely full by the end of H1. “We are very bearish for the first half of the year,” Dudley said at the IP Week conference in London Wednesday. “In the second half, every tank and swimming pool in the world is going to fill and fundamentals are going to kick in,” he added. “The market will start balancing in the second half of this year.”

Maybe. Or maybe excess supply will simply be dumped on the market once all the “swimming pools” are full.

If that happens, don’t be surprised to see crude crash into the teens as attempts to clear and dump excess inventory spread like wildfire across the market.

Earlier this week, the IEA called any respite for crude prices “a false dawn.” Here’s why (via The Guardian):

…click on the above link to read the rest of the article…

2016: Oil Limits and the End of the Debt Supercycle

January 7, 2016

2016: Oil Limits and the End of the Debt Supercycle

What is ahead for 2016? Most people don’t realize how tightly the following are linked:

Growth in debt
Growth in the economy
Growth in cheap-to-extract energy supplies
Inflation in the cost of producing commodities
Growth in asset prices, such as the price of shares of stock and of farmland
Growth in wages of non-elite workers
Population growth

It looks to me as though this linkage is about to cause a very substantial disruption to the economy, as oil limits, as well as other energy limits, cause a rapid shift from the benevolent version of the economic supercycle to the portion of the economic supercycle reflecting contraction. Many people have talked about Peak Oil, the Limits to Growth, and the Debt Supercycle without realizing that the underlying problem is really the same–the fact the we are reaching the limits of a finite world.

There are actually a number of different kinds of limits to a finite world, all leading toward the rising cost of commodity production. I will discuss these in more detail later. In the past, the contraction phase of the supercycle seems to have been caused primarily by too high population relative to resources. This time, depleting fossil fuels–particularly oil–plays a major role. Other limits contributing to the end of the current debt supercycle include rising pollution and depletion of resources other than fossil fuels.

The problem of reaching limits in a finite world manifests itself in an unexpected way: slowing wage growth for non-elite workers. Lower wages mean that these workers become less able to afford the output of the system. These problems first lead to commodity oversupply and very low commodity prices. Eventually these problems lead to falling asset prices and widespread debt defaults.

…click on the above link to read the rest of the article…

Oil Prices Down As Storage Keeps On Filling Up

November 26, 2015

Oil Prices Down As Storage Keeps On Filling Up

Happy Thanksgiving Eve! One hundred and forty-eight years to the day after Alfred Nobel patented dynamite, and the fuse has been lit for an explosion to the downside for the crude complex.

After geopolitical tension was stoked yesterday, attention shifts back to oversupply today with the weekly EIA inventory report. Yesterday afternoon’s API report yielded a build of 2.6 million barrels to crude stocks, as well as solid builds to the products. This has adjusted expectations ahead of the EIA report, as a lesser 1 million barrel build was being baked into the cake.

Yesterday we discussed how copper is at a six-and-a-half year low due to a combination of falling Chinese demand and a rising US dollar. The chart below illustrates that despite the downward trend in copper prices, an ongoing supply glut is set to persist, as lower-cost projects come to fruition after billions of dollars have already been invested. Accordingly, global copper production is expected to reach an all-time this year…and is projected to rise through the rest of the decade.

Given the broad-based sell-off we have seen in commodities, from copper to crude to coal, Bloomberg’s commodity index – which tracks 22 natural resources – has plunged two-thirds lower from its peak in 2008 to the lowest level since 1999:

Today is ‘double data day‘, as tomorrow’s Thanksgiving holiday means we get the EIA natural gas storage report a day early. A minor injection of +6 Bcf is expected, which will further add to the record storage level of 4.000 Tcf.

…click on the above link to read the rest of the article…

Oil May Plunge to $20, Signalling Economic Disaster: “The Numbers Are Dreadful And Unprecedented”

November 22, 2015

Oil May Plunge to $20, Signalling Economic Disaster: “The Numbers Are Dreadful And Unprecedented”

The price of oil has long been a key indicator of economic health and stability. And that index is tanking fast.

In the last few years, dramatic overproduction of oil has become a major tool of geopolitical conflict.

As prices have plummeted from $110/barrel to $40, Americans have tapped huge sources of fracking and flooded the market; OPEC and the Saudis have continued pumping despite dropping prices; Russia, dependent upon oil for its economy, has been under siege via sanctions and bottom-level prices; ISIS and other terror organizations are undercutting everyone with illegal oil sales and China remains large in the whole affair.

Proxy wars and threats and rumors of world war have accompanied bitter economic warfare over currencies and energy. Now, oil is at a record level of glut, and nearly every storage facility in the world is filled past capacity.

The London Telegraph reports:

The world is running out of storage facilities for surging supplies of oil and may soon exhaust tanker space offshore, raising the chances of a violent plunge in crude prices over coming weeks, experts have warned.

Goldman Sachs told clients that the increasing glut of oil on the global market […] could send prices plummeting to $20 a barrel, the so-called ‘cash cost’ that forces drillers to abandon production. “Risks of a sharp leg lower remain elevated,” it said.

[…]

It is estimated that at least 100m barrels are now being stored on tankers offshore, waiting for better prices. A queue of 39 vessels carrying 28m barrels is laid up outside the Texas port of Galveston, while the Iranians have a further 30m barrels offshore ready to sell as soon as sanctions are lifted.

…click on the above link to read the rest of the article…

Oil Tankers Are Filling Up As Global Storage Space Runs Low

November 13, 2015

Oil Tankers Are Filling Up As Global Storage Space Runs Low

The rebound in oil prices is still not here, and new data suggests that it will take some more time before the markets start to balance out.

Global supplies are still too large to justify a significant rally in oil prices. The latest indicator that the glut of oil has yet to ease comes from the FT, which concludes that there is 100 million barrels of oil sitting in oil tankers. Oil has piled up in tankers that are floating at sea, as onshore storage space begins to dwindle.

The level of crude oil stashed at sea is nearly double what it was earlier in 2015. “Onshore storage is not quite full but it is at historically high levels globally,” David Wech of JBC Energy told the FT. “As we move closer to capacity that is creating more infrastructure hiccups and delays in the oil market, leading to more oil being backed out on to the water.”

Rising levels of crude stored at sea has more to do with shrinking capacity onshore, rather than traders stockpiling volumes in order to profit from an eventual rebound in prices. Oil tanker rates have surged this year, so it doesn’t exactly make sense to store oil at sea strictly for a trading opportunity. Daily rates for very large crude carriers (VLCCs) are around $60,000 per day, although down from a peak of $111,000 per day hit on October 8. The collapse of crude prices over the past year have contributed to a surge in tanker rates – while volatile, VLCC daily rates consistently ran as low as $20,000 over the last few years.

…click on the above link to read the rest of the article…

Oil storage tanks filled to levels not seen in 80 years

August 14, 2015

Oil storage tanks filled to levels not seen in 80 years

U.S. oil inventories at levels not seen in at least 80 years

North American oil prices could take a hit this fall as there are renewed concerns about a lack of storage capacity.

A recent report by the U.S. Energy Information Agency suggests crude oil inventories “remain near levels not seen for this time of year in at least the last 80 years.”

The concern is what will happen this fall and whether oil supplies will hit “tank top.” North American refineries are running at near capacity this summer, buying up oil and converting it to gasoline and other products. Several refineries will shut down in a few months for maintenance and there could be more unplanned outages because refineries are operating at such a high level.

Each fall, it’s typical for inventories to begin to build, but “the problem is we are at a much higher starting point,” said Jackie Forrest, a vice-president with ARC Financial, who monitors trends in the Canadian oil and gas industry. A lack of storage could impact North American oil prices and in particular West Texas Intermediate (WTI), the benchmark for the continent.

“It could cause a bit of a disconnect where WTI becomes a bit cheaper than global crudes, but I don’t think it is going to cause a serious problem where there is no room to store crude,” said Forrest.

Canadian oil production is expected to rise over the next few decades.

The oilpatch had similar concerns in the spring. At that time, some companies began turning to ‘fracklog’ as one method of storing oil. Producers continue to drill wells, but stop just short of pumping out the oil. It’s a way of storing the oil in the ground. The goal is to hold on to the oil until prices rebound.

…click on the above link to read the rest of the article…

U.S. Oil Glut Story Grossly Exaggerated

March 30, 2015

U.S. Oil Glut Story Grossly Exaggerated

It’s called the “age of propaganda” where truth matters little and comes out later in so called revisions. Take the recent spate of economic data points from the Kansas City Fed which said that economic activity not only stalled but wasnegative at -4 vs expectations of +1. The recent durable goods statistics also show contraction as well.

Yet we see the services PMI at a 6 month high. How can these divergences be possible? Well for one, some statistics are hard while others are estimated/massaged and others are seasonally adjusted or estimated (only to be revised later). In oil, the same thing appears to be occurring as we speak. The near record pace of oil storage additions in some weeks nearing 8-10 million barrels per day comes at a time when all indicators are that oil production is slowing.

Even using the EIA’s own data, production is up some 500,000 per day since October or 3.5M per week. So how can more than two times that be added to storage while gasoline demand accelerates to 5% year over year from low single digits? Refinery maintenance is part of it, yes, as well as seasonality as people drive less in absolute terms, so as production continues this would explain storage adds, but to this magnitude?

…click on the above link to read the rest of the article…

The Perfect Storm For Oil Hits In Two Months: US Crude Production To Soar Just As Storage Runs Out

March 22, 2015

The Perfect Storm For Oil Hits In Two Months: US Crude Production To Soar Just As Storage Runs Out

Less than two weeks ago we warned that based on the current oil production trend, the US may run out of storage for crude as soon as June.

This is what we said back in early March when the BTFDers were hoping WTI in the low $40s would never again be seen:

Come June, when all available on-land storage is exhausted, each incremental barrelwill have to be dumped on the market forcing prices lower and inflicting further pain on the entire US shale complex (just as Q1 results are released which will invariably show huge writedowns as companies will no longer be able to hide behind the SEC-mandated accounting trick that made Q4 results appear respectable). Here’s Soc Gen: “…oil markets can be impatient and prices could drop considerably lower. As we have written previously, we are currently more concerned about downside risk than upside risk.”

Since then, as expected, crude tumbled to new post-Lehman lows, confirming the global deflationary wave is raging (for more details please see China), and WTI only posted a rebound on quad-witching Friday as another algo-driven stop hunt spooked all those who were short the energy complex.

…click on the above link to read the rest of the article…

The Truth About U.S. Crude Storage

March 14, 2015

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

…click on the above link to read the rest of the article…

US May Run Out Of Oil Storage Space As Soon As June

March 10, 2015

US May Run Out Of Oil Storage Space As Soon As June

On Sunday, we noted that the economics of the floating storage play could spell further declines for crude prices. With a global stock increase that’s some 3 times larger than that which occurred during the last period of oversupply, expect cheap, on-land storage to prove inadequate necessitating the use of VLCCs. According to Soc Gen, determining how far the front end of the curve would have to fall in order for traders to arbitrage the difference between buying and storing physical oil and selling paper forward is a good indicator for where prices may find a floor:

…the bank is looking for the front end of the curve to fall until the contango is wide enough to make the floating storage play enticing.

The example Soc Gen uses shows that Brent needs to see ~$49 before the trade is sufficiently profitable.

The takeaway, we noted, is that storage availability and contango should be taken into account when considering the future direction of oil prices. With production still climbing despite the decline in rig count, it seems supply may, in short order, outstrip storage capacity for as the following two charts show, crude storage capacity in the US is now at 60% and is set to be completely exhausted by June:

…click on the above link to read the rest of the article…

Oil Price Faces Another 20% Drop Due To Contango Math

March 9, 2015

Oil Price Faces Another 20% Drop Due To Contango Math

Want to know where oil prices are headed? You need to understand the economics of the floating storage play, Soc Gen says.

As we noted on Friday, retail investors looking to be the next Jed Clampett have piled into the U.S. Oil fund over the past several months, presumably unaware of the extreme contango in the market. That said, it’s not just retail investors who are itching to dive in. Here’s Soc Gen:

The motivation to buy it [is] widespread and not always based on traditional market analysis – consumers [are] keen to lock in lower prices with their newly expanded credit lines, due to the decline in the notional value of their existing hedges. Endowments and Sovereign Wealth Funds (SWFs) [are] under pressure to use the “opportunity” to claw back recent losses.

For those looking to make a play near the bottom, it’s worth considering the level at which the oil storage trade becomes profitable. At its core, the trade is simple:

A trader buys physical oil now at a low price, and simultaneously sells paper forward at a high price, thus locking in a profit margin. If this profit margin is higher than the cost of fixing a vessel to store it on, the trade works, and it should happen.

Although, as Reuters notes, “the capacity of U.S. commercial oil storage tanks has expanded by a third since 2010,” the global stock increase is set to be nearly 3 times bigger than during the last oversupply period (in the aftermath of the crisis). Given that floating storage was used in 2008-2009, it’s likely that cheaper on-land storage capacity will dwindle necessitating the use of crude carriers this time around as well. And with that, here is your step-by-step guide to the floating storage play courtesy of Soc Gen:

…click on the above link to read the rest of the article…

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