“We don’t want to lose our share in the market,” Kuwait Oil Minister Ali al-Omair said on Thursday. OPEC had to maintain production despite the plunge in price since last summer, he said, underscoring Saudi Arabia’s position. OPEC would not cut production to goose prices. It would not let the American fracking boom off the hook.
The price of oil promptly dropped, annihilating much of the Fed-inspired rally the day before.
No one wants to cut production. In the US, production is still soaring. Demand is lackluster. What gives? Crude oil is piling up around the globe.
Commercial inventories across all OECD countries can now supply 28 days’ of OECD demand, near the very top of the range, the EIA reported.
In the US, the amount of oil in commercial storage facilities (not counting the Strategic Petroleum Reserve) is at historic highs. Another 9.6 million barrels were added during the latest week. To put that in perspective: the US produces 9.3 million barrels per day. So in one week, the US added nearly one day’s production to its already high crude oil stocks! According to the EIA, stocks now amount to 458.5 million barrels, up 22% from a year ago.
By another measure, at the end of February the US was sitting on 29 days’ supply, the most since the 1980s when the last big oil bust was wreaking havoc in the American oil patch.
Speculation is now running wild that the US will run out of crude oil storage capacity. Some voices are claiming that storage in Cushing, Oklahoma, which accounts for 14% of the US total and serves as delivery point for WTI futures contracts, could be full by April.
These speculations have dollar signs at the other end. When storage gets scarcer, or when the perception can be stirred up that it will get scarcer, storage fees jump, boosting revenues and profits of the storage companies. There’s money to be made, as long as the speculation can be maintained. And so the insiders came out all guns blazing.
“Demand for our storage services in Cushing has been robust,” said Robb Barnes, senior VP for commercial crude oil at Magellan Midstream Partners LP, according to Bloomberg. The company has 12 million barrels of storage capacity in Cushing, and all its tanks had been leased, it said.
Fees have been rising “fairly rapidly over the last six months,” Blueknight Energy Partners CEO Mark Hurley told investors. The company has 6.6 million barrels of capacity at Cushing.
All publicly traded storage companies have told investors that profits in 2015 would be higher than in 2014. At least someone is making money during the oil bust.
And it’s not just in the US.
“You’ll find all the locations around the world that can store crude now, like Saldanha Bay or the Caribbean, are going to be full,” said Jared Pearl, commercial director of VTTI in Rotterdam. The group includes Vitol, the largest independent oil trader. “It would be crazy if they weren’t.”
And just when we might be tempted to think – cynical as we are about these sorts of things – that they were just talking their book, China, second largest oil consumer in the world, chimes in.
China has been buying cheap oil since August to fill its Strategic Petroleum Reserves. This buying has been one of the demand drivers in Asia and has provided some support even while prices crashed. The government keeps largely mum about the SPR. But the plan is to increase it to around 600 million barrels, which would be about 90 days’ worth of imports. According to Reuters, most estimates place current storage levels at 30-40 days’ worth of imports. In December, China imported an all-time record of 7.2 million barrels per day. Alas…
“I don’t think there is much space left to fill,” a Chinese storage executive told Reuters under the condition of anonymity. He said that in the Zhoushan area of Zhejiang province, where two SPR bases and major commercial storage facilities are located, tanks “are so full that one VLCC tanker owned by a state refiner has had to wait for almost 15 days to discharge.”
Then there is the demand issue. The Chinese economy is growing, according to government figures, at the slowest rate in 25 years. And now there are expectations that refiners could process less crude in the second quarter. So China will likely curtail its purchases, at least temporarily.
Including China, Asian crude oil imports overall have dropped 5% from the peak in December, according to Thomson Reuters data. Imports by India were down 20% in February from a year ago; imports by Japan were down 11%, largely due to the approaching refinery maintenance season.
Even if these folks are talking their book to goose storage fees, one thing is clear: storage levels are high around the globe, and they’re still rising, while demand is nothing to write home about. It adds to the picture of a worsening global oil glut that will continue to pressure prices, bloody up producers, and maul investors and lenders.
The fracking boom in the US started with natural gas. And now it’s destroying its investors. Read… Investors Crushed as US Natural Gas Drillers Blow Up
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If this is correct three of the shale plays are in decline with demand expected to be going up soon. If anything, the glut(estimated to be as little as 800,000 bpd according to some estimates) is likely to get smaller in the future rather than bigger. We won’t know for a while.
Supply is part of the picture, but so is demand. There are many strong currents right now that point to deflationary/reccessionary markets. Even if supply is declining, demand could decline faster and produce yet more surplus.
Have to look at the whole picture.
My biggest concern is that when we have the next leg down (might be in process right now), it is going to be VERY big. The junk bond market behind shale is huge. Those losses are going to be SOMEONES losses. If that begets more selling, this could easily be the start of the avalanche of size and the Fed is pretty much out of tools to do anything (NIRP?). At this point, it becomes a game of who eats the losses, which will end up being tax payers if the last go around is any indication.
But that implies someone picks winners and losers and I am not privy to how those calls are going to be made.
Presently I am planning to move my liquid savings over to TreasuryDirect and put it in rolling 3 month to 1 year bills. I would rather have my funds sitting in a CoI earning nothing (which is what they get at the bank anyway) than actually being in the bank.
I think it is going to get that bad. And once the bail out mess is over, I can put my funds back in the system and go shopping at low prices.
String of junk bond defaults in the bond market absent of defaults since Lehman/Bear Stearns which the market did not see coming may not only be the canary in the coal mine but start the vicious unwinding of complicated leveraged to hilt derivatives and counterparty risks “souped” up by the banksters to profit (and bet against its own muppet clients). AIG bailed out by taxpayers paid everyone off last time but this time it just may be different.
No worries though as you pointed out the Fed puffed up with overconfidence of bailing out the LTCM, Lehman/BS, Fannie/Freddie, AIG, etc. debacles will come to the rescue but the size of next bubble is getting bigger and this time it may be different especially the market depends on the Fed bailout for excesses and speculations. So much for capitalism and allowing banks and investors to lose their shirts for making wrong bets.
This is fun….
9-17-2001 Dow crashes 685 points, 1st day of trading post 911 attacks.
fast forward 7 years to the date
9-29-2008 Dow nose dives 777 points
fast forwarding 7 years would put us at 9-13-2015, that could be the day shit hits the fan! It falls on a Sunday, so the 11th or the 14th. My bet it will be the 11th because of that dates significance. Cue the scary music….. now
Okay Jeff – I’ll take the bet – loser pays for dinner.
What’s for Dinner Malcolm??
We can keep going back in history If you want, I just did the latest two events. I’m not saying its a for sure thing…..but, I find it interesting none the less. The dotcom bubble and crash in 2000 is an oddball. But it does signal the transition from Autumn to Winter in the Longwave principle, which is quite interesting too!
7 years prior to 9/11/2001 the Bond market crash of 1994
7 years prior to 1994, “Black Monday” The DJIA lost 22.6%
7 years prior to 1987, the start of the 1980 to 1982 recession
7 years prior to 1980, the 1973 oil crisis
7 years prior to 1973, the 1966 Financial Crisis,
Yep, I’m with Jeff. This pattern is too consistent to ignore. I wouldn’t bet it happens exactly sept 13, but this fall is my time frame.
Interesting thesis, Cooter. Do you have any idea of the size of this market segment. Hiw does it compare in size to the 2007 mortgage derivatives market with or without the AIG credit default swaps?
No doubt there is a glut, but what I don’t see mentioned very much is that the global economy is in recession. Hell, the US GDP was barely positive last quarter and a good part of the weakness was due to the oil business crashing. Don’t expect it to be any better next quarter…
Alas, the Vogon destructor fleet is due to arrive before the completion of the current 7 year cycle.
The notice can be found in your local planning office orbiting Barnard’s star.
While autumnal crashes seem to be the norm there are some spring crashes of note. Let’s get through March, first. Holy Ghostbusters Batman! Real wrath of God type stuff…dogs and cats living together…
ok, Wolf, as you know our oil production is up almost 15% from a year ago, our oil inventories are up around 22% over the same period, yet the weekly Petroleum Status Report showed that US crude oil imports averaged 7.5 million barrels per day last week, up by 703,000 barrels a day from our imports in the first week of March, and that in the four weeks ending March 13th, US crude oil imports averaged over 7.2 million barrels per day, 0.6% higher than the same 4 week period last week…
so despite the oil glut, the shortage of storage, and the 15% YoY increase in production, we continue to import as much as, if not more than, we did a year ago…i’ve been thinking it’s due to the contango trade…do you see any other explanation?
Good question, rjs.
Your answer fits.
– long-term delivery contracts
– refineries’ needs for certain grades of oil that they’re designed to process and that the US doesn’t produce enough of.
– And don’t forget, the US is a big EXPORTER of refined petroleum products – some of these tankers go right by my window every day, loaded at the refineries in Richmond across the Bay. Increasingly, this includes unrefined or barely refined petroleum products for which there is not enough demand in the US (the Bakken produces a lot of those). These exports have to be replaced by imports.
ok, the YoY increase exports explains a lot of it, Wolf, and i feel pretty stupid for not realizing that immediately, since i wrote about that increase just 3 weeks ago…this includes links to each EIA dataset:
hope that’s not a sign of aging…