(John Kemp is a Reuters market analyst. The views expressed are his own)
LONDON – Commercial crude stocks across the United States rose by 105 million barrels early this year to peak at 490 million barrels, the highest level in eight decades.
Despite some draw downs in recent weeks, which have reduced inventories to 460 million barrels, stocks are still 92 million barrels higher than this time last year.
And stocks could rise again at the end of the third quarter when U.S. refineries enter the traditional autumn turn around season.
Yet the cost of storing crude has remained relatively modest throughout thanks to a big increase in tank farm and pipeline capacity added in recent years.
Working storage capacity at refineries, tank farms and underground storage facilities in the United States has increased by 85 million barrels, almost 19 percent, since 2011.
More than 45 million barrels of extra working capacity has been added in just the last two years, according to the U.S. Energy Information Administration (EIA).
Over half the extra working storage capacity was in states along the U.S. Gulf Coast, with most of the rest added in the Midwest.
In the same period, the amount of crude needed to fill pipelines and in transit by barge, tanker and rail has also jumped by 17 million barrels, as new oil pipelines and oil trains were added.
Crude stocks at the end of March were 82 million barrels higher than in March 2013, according to the EIA (“Working and net available shell storage capacity” May 2015).
But with an extra 17 million barrels of oil in line fill and transit, and 46 million barrels of extra working capacity, the storage utilization rate rose comparatively modestly from 56 percent to 63 percent.
The availability of so much storage helps explain why the contango in U.S. crude futures has mostly been well below $1 per barrel per month since the start of the year.
Predictions that storage capacity would run out, which briefly pushed the contango beyond $1 per barrel per month in February and March, proved wide of the mark.
And there has been only relatively modest demand for the more expensive option of storing oil on tankers moored off the coast.
Storage is big business and very profitable under the right conditions. It has attracted significant interest from trading companies and third-party logistics suppliers (3PLs).
Nearly all the extra working storage capacity in the United States has been added at tank farms and underground facilities rather than refineries.
Many of the tanks are owned directly by traders or are available for hire.
Much of the storage is designed to facilitate speculative plays and to take advantage of temporary market imbalances rather than meet immediate operational needs of the refining system for short-term supply security and blending.
Pure storage companies make money from leasing capacity. Merchants exploit the difference between the cost of storing and financing oil implied by the contango and the actual cost of borrowing funds and leasing tank space. Many companies now do both.
Once facilities are constructed, there is an incentive to fill them, if and when it can be done profitably, to earn a return on the investment, which is why so much of the global stock build in the first quarter of 2015 turned up in the United States.
Construction of storage capacity tends to increase the amount of stock the market wants to carry by reducing the cost of stockpiling.
Other major merchant storage facilities are available at Rotterdam, Saldanha Bay in South Africa, the Bahamas and Singapore, among other centers, and many are adding even more capacity.
The merchanting and storage business model tends to draw surplus oil preferentially towards U.S. tank farms and the other storage hubs.
At the same time, the United States is the only country to publish official weekly and monthly data on stocks in close to real time.
There is a natural tendency to draw conclusions about the state of the global supply-demand balance on the basis of short-term changes in U.S. commercial stockpiles.
But the U.S. storage model is not representative of stocks globally, so conclusions about the global supply-demand must be drawn carefully, both when stocks are rising and when they are falling.
The oversupply in oil markets during the first half of 2015 was real, but the profitability of storage plays probably exaggerated the change in the overall stock situation in the short term.
If the contango remains favorable – and it’s currently running at 50 cents per barrel per month between September and December – more crude will be imported and stockpiled in the United States this autumn to fill the tank farms again.
(Editing by David Evans)
This article was from Reuters and was legally licensed through the NewsCred publisher network.