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Last Updated: April 14, 2016
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Demand for storage is reaching a fever pitch with tank capacity and utilization at all-time highs, but the storage market is volatile and at the same time could be barreling toward oversupply.

 

The US crude market is in contango, meaning crude is worth less for delivery now than later. That dynamic encourages storage, but it could reverse as the contango narrows and production shrinks while tank capacity continues to expand.

 

There is an easy comparison between the take-or-pay contracts on pipelines and storage tanks, which might give a hint of things to come if the market structure reverses. Under both kinds of contracts, the counterparty has to either use the committed space on the asset or pay a penalty, often as much as the price to use the space in the first place.

 

In the case of pipelines, that pushed Midland WTI into a premium over its counterpart in Cushing as demand for crude to meet shipping commitments stacked up at the pipelines’ origin terminals. Not only that, but the existence of the contracts helped drive investment in infrastructure, which contributed to the explosive growth in pipeline capacity since the turn of the decade.

 

If the contracts have a similar effect on the storage market, it would likely manifest in stronger prompt prices, with weaker prices further down the curve — especially if production declines, leaving marketers who expected growth holding contracts to store barrels that don’t exist. For now, at least, imports have been able to keep driving storage demand, but how long might that last as the contango flattens out?

 

A capacity oversupply would lend strength to the crude prompt market by creating demand simply to meet the contractual commitments that underpin current and upcoming projects’ volume agreements. It could also apply downward pressure to the back end of the contango structure, because cheaper storage lets marketers work slimmer time spreads, Bentek Energy Analysis Manager Anthony Starkey said.

 

“It doesn’t really ‘solve’ anything, but [an overbuild] could provide that kind of support for oil,” Starkey said.

 

Though March and April so far have seen a relatively wide contango, with the front-month WTI contract in Midland averaging $1.48/b less than the second-month contract, it is still lower than February, which averaged $1.94/b.

 

The sustained contango has buoyed crude stocks in the US to an unusually-high 529.9 million barrels.

 

Those stocks are especially concentrated in Cushing, Oklahoma, with 66.32 million barrels and the Gulf Coast, which holds 277.54 million barrels.

 

What happens when contango becomes backwardation?

 

“If the market is in contango, there’s never enough storage, and if it’s in backwardation, there’s too much,” said Andy Lipow, president of Lipow Oil Associates.

 

The issue of having too much or too little storage capacity ultimately boils down to market structure at any given time, Lipow said.

 

This principle plays out in the available storage capacity versus crude oil inventory levels at Cushing terminals over the last couple of years. With crude stocks are roughly 89% of working capacity utilized, demand is high at the Oklahoma storage hub.

 

While the current contango structure has lent support to demand for storage, it probably hasn’t been particularly influential in the decision to build new infrastructure, CEO Ernie Barsamian of The Tank Tiger said.

 

Especially now that the contango is far from a fresh dynamic on the market, building new infrastructure on that basis is “fool’s gold,” Barsamian said.

 

“We’re kind of moving to the end of that period,” Barsamian said. “It’s kind of like building a new hotel in Vegas.”

 

In fact, the rate of greenfield expansions, wherein a company builds a completely new facility, haven’t accelerated at all, Barsamian said. Most of the growth is coming in the form of expansions to existing facilities.

 

Right now, for instance, Phillips 66 is planning incremental expansions to its 7.1 million-barrel crude and refined product storage facility in Nederland, Texas. The company plans to add 2.3 million barrels over the next two or three years, with an eventual maximum potential of more than 16 million barrels, spokeswoman Lara Burhenn said.

 

If supply overshoots demand, the older storage terminals will likely lose business to their better-connected, fresher counterparts, Barsamian said.

 

“That’s always going to happen,” he said. “You get these new facilities built, but they’re not going to end up empty.”

 

Author: Joshua Mann, Reporter (Platts)

Mary Hogan, a Platts reporter in Houston, also contributed to the research and writing in this post.

 

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Latest NrgBuzz

Financial Review: 2019

Key findings

  • Brent crude oil daily average prices were $64.16 per barrel in 2019—11% lower than 2018 levels
  • The 102 companies analyzed in this study increased their combined liquids and natural gas production 2% from 2018 to 2019
  • Proved reserves additions in 2019 were about the same as the 2010–18 annual average
  • Finding plus lifting costs increased 13% from 2018 to 2019
  • Occidental Petroleum’s acquisition of Anadarko Petroleum contributed to the largest reserve acquisition costs incurred for the group of companies since 2016
  • Refiners’ earnings per barrel declined slightly from 2018 to 2019

See entire annual review

May, 26 2020
From Certain Doom To Cautious Optimism

A month ago, the world witnessed something never thought possible – negative oil prices. A perfect storm of events – the Covid-19 lockdowns, the resulting effect on demand, an ongoing oil supply glut, a worrying shortage of storage space and (crucially) the expiry of the NYMEX WTI benchmark contract for May, resulted in US crude oil prices falling as low as -US$37/b. Dragging other North American crude markers like Louisiana Light and Western Canadian Select along with it, the unique situation meant that crude sellers were paying buyers to take the crude off their hands before the May contract expired, or risk being stuck with crude and nowhere to store it. This was seen as an emblem of the dire circumstances the oil industry was in, and although prices did recover to a more normal US$10-15/b level after the benchmark contract switched over to June, there was immense worry that the situation would repeat itself.

Thankfully, it has not.

On May 19, trade in the NYMEX WTI contract for June delivery was retired and ticked over into a new benchmark for July delivery. Instead of a repeat of the meltdown, the WTI contract rose by US$1.53 to reach US$33.49/b, closing the gap with Brent that traded at US$35.75b. In the space of a month, US crude prices essentially swung up by US$70/b. What happened?

The first reason is that the market has learnt its lesson. The meltdown in April came because of an overleveraged market tempted by low crude oil prices in hope of selling those cargoes on later at a profit. That sort of strategic trading works fine in a normal situation, but against an abnormal situation of rapidly-shrinking storage space saw contract holders hold out until the last minute then frantically dumping their contracts to avoid having to take physical delivery. Bruised by this – and probably embarrassed as well – it seems the market has taken precautions to avoid a recurrence. Settling contracts early was one mechanism. Funds and institutions have also reduced their positions, diminishing the amount of contracts that need to be settled. The structural bottleneck that precipitated the crash was largely eliminated.

The second is that the US oil complex has adjusted itself quickly. Some 2 mmb/d of crude production has been (temporarily) idled, reducing supply. The gradual removal of lockdowns in some US states, despite medical advisories, has also recovered some demand. This week, crude draws in Cushing, Oklahoma rose for the second consecutive week, reaching a record figure of 5.6 million barrels. That increase in demand and the parallel easing of constrained storage space meant that last month’s panic was not repeated. The situation is also similar worldwide. With China now almost at full capacity again and lockdowns gradually removed in other parts of the world, the global crude marker Brent also rose to a 2-month high. The new OPEC+ supply deal seems to be working, especially with Saudi Arabia making an additional voluntary cut of 1 mmb/d. The oil world is now moving rapidly towards a new normal.

How long will this last? Assuming that the Covid-19 pandemic is contained by Q3 2020, then oil prices could conceivably return to their previous support level of US$50/b. That is a big assumption, however. The Covid-19 situation is still fragile, with major risks of additional waves. In China and South Korea, where the pandemic had largely been contained, recent detection of isolated new clusters prompted strict localised lockdowns. There is also worry that the US is jumping the gun in easing restrictions. In Russia and Brazil – countries where the advice to enforce strict lockdowns was ignored as early warning signs crept in – the number of cases and deaths is still rising rapidly. Brazil is a particular worry, as President Jair Bolosnaro is a Covid-19 skeptic and is still encouraging normal behaviour in spite of the accelerating health crisis there. On the flip side, crude output may not respond to the increase in demand as easily, as many clusters of Covid-19 outbreaks have been detected in key crude producing facilities worldwide. Despite this, some US shale producers have already restarted their rigs, spurred on by a need to service their high levels of debt. US pipeline giant Energy Transfer LP has already reported that many drillers in the Permian have resumed production, citing prices in the high-US$20/b level as sufficient to cover its costs.

The recovery is ongoing. But what is likely to happen is an erratic recovery, with intermittent bouts of mini-booms and mini-busts. Consultancy IHS Markit Energy Advisory envisions a choppy recovery with ‘stop-and-go rallies’ over 2020 – particularly in the winter flu season – heading towards a normalisation only in 2021. It predicts that the market will only recover to pre-Covid 19 levels in the second half of 2021, and a smooth path towards that only after a vaccine is developed and made available, which will be late 2020 at the earliest. The oil market has moved from certain doom to cautious optimism in the space of a month. But it will take far longer for the entire industry to regain its verve without any caveats.

Market Outlook:

  • Crude price trading range: Brent – US$33-37/b, WTI – US$30-33/b
  • Demand recovery has underpinned a rally in oil prices, on hopes that the worst of the demand destruction is over
  • Chinese oil demand is back to the 13 mmb/d level, almost on par year-on-year
  • News that development of potential Covid-19 vaccines are reaching testing phase also cheered the market
  • The US active oil and gas rig count lost another 35 rigs to 339, down 648 sites y-o-y

---------------####---------------

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May, 23 2020
EIA expects record liquid fuels inventory builds in early 2020, followed by draws

quarterly global liquid fuels productionand consumption balance

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO), May 2020

As mitigation efforts to contain the 2019 novel coronavirus disease (COVID-19) pandemic continue to lead to rapid declines in petroleum consumption around the world, the production of liquid fuels globally has changed more slowly, leading to record increases in the amount of crude oil and other petroleum liquids placed into storage in recent months. In its May Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) expects global inventory builds will be largest in the first half of 2020. EIA estimates that inventory builds rose at a rate of 6.6 million barrels per day (b/d) in the first quarter and will increase by 11.5 million b/d in the second quarter because of widespread travel limitations and sharp reductions in economic activity.

After the first half of 2020, EIA expects global liquid fuels consumption to increase, leading to inventory draws for at least six consecutive quarters and ultimately putting upward pressure on crude oil prices that are currently at their lowest levels in 20 years.

As with the March and April STEO, EIA’s forecast reductions in global oil demand arise from three main drivers: lower economic growth, less air travel, and other declines in demand not captured by these two categories, largely related to reductions in travel because of stay-at-home orders. Based on incoming economic data and updated assessments of lockdowns and stay-at-home orders across dozens of countries, EIA has further lowered its forecasts for global oil demand in 2020 in the May STEO. The STEO is based on macroeconomic projections by Oxford Economics (for countries other than the United States) and by IHS Markit (for the United States).

changes in quarterly global petroleum liquids consumption

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO), May 2020

In the May STEO, EIA forecasts global liquid fuels consumption will average 92.6 million b/d in 2020, down 8.1 million b/d from 2019. EIA forecasts both economic growth and global consumption of liquid fuels to increase in 2021 but remain lower than 2019 levels. Any lasting behavioral changes to patterns in transportation and other forms of oil consumption once COVID-19 mitigation efforts end, however, present considerable uncertainty to the increase in consumption of liquid fuels, even if gross domestic product (GDP) growth increases.

Members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) agreed to new production cuts in early April that will remain in place throughout the STEO forecast period ending in 2021. EIA assumes OPEC members will mostly adhere to announced cuts during the first two months of the agreement (May and June) and that production compliance will relax later in the forecast period as stated production cuts are reduced and global oil demand begins growing.

EIA forecasts OPEC crude oil production will fall to less than 24.1 million b/d in June, a 6.3 million b/d decline from April, when OPEC production increased following an inconclusive meeting in March. If OPEC production declines to less than 24.1 million b/d, it would be the group’s lowest level of production since March 1995. The forecast for June OPEC production does not account for the additional voluntary cuts announced by Saudi Arabia’s Energy Ministry on May 11.

EIA expects OPEC production will begin increasing in July 2020 in response to rising global oil demand and prices. From that point, EIA expects a gradual increase in OPEC crude oil production through the remainder of the forecast and for production to rise to an average of 28.5 million b/d during the second half of 2021.

changes in quarterly global petroleum liquids production

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO), May 2020

EIA forecasts the supply of non-OPEC petroleum and other liquid fuels will decline by 2.4 million b/d in 2020 compared with 2019. The steep decline reflects lower forecast oil prices in the second quarter as well as the newly implemented production cuts from non-OPEC participants in the OPEC+ agreement. EIA expects the largest non-OPEC production declines in 2020 to occur in Russia, the United States, and Canada.

May, 20 2020