Fill 'er up. Storage tanks at Cushing, Oklahoma.
Planes are grounded. Factories closed. Millions of commuters are staying at home. Coronavirus panic has cratered demand for fuels and other petroleum products by nearly 10% worldwide. Add in the extra 1 million-plus barrels per day that the Saudis and Russians have decided to pump into the market amid a marketshare war — and the global glut of crude oil is set to approach 10 million barrels per day. “This is a dual shock with almost no precedent,” notes analyst Amrita Sen of Energy Aspects, this week. Oil prices, at $25 per barrel for West Texas Intermediate, are lower than at any time since 2002.
America’s frackers have been slashing spending to preserve cash. Billionaire Harold Hamm said today that his Continental Resources would reduce the number of drillings rigs it’s running from 9 to 3, and likely exit the year producing 5% less oil than at the beginning. Dozens of other companies have followed suit, with Halliburton this week announcing that it would furlough 3,500 workers on fracking crews. Hamm, having lost billions in the downturn, has been lobbying for a federal investigation into Russian and Saudi “illegal dumping.” Treasury Secretary Steven Mnuchin suggested today that Congress should appropriate $20 billion to essentially buy 1 billion barrels of cheap oil and save it for a rainy day.
The problem is, there’s not enough places to put it.
The world has about 900 million barrels of available storage capacity right now, figures Energy Aspects. That includes about 250 million barrels in China, 70 million in the U.S. Strategic Petroleum Reserve, and 40 million each in South Africa, Japan, South Korea and Cushing. If the coronavirus panic continues 350 million barrels of that storage will be filled up by June, with the rest of it maxxed out to “tank tops” by autumn 2020. U.S. storage for some products, like jet fuel, will reach capacity within a month, according to Rystad analyst Per Magnus Nysveen.
Sandy Fielden, diector of oil research at Morningstar, explains that the promised flood of Saudi and Russian oil will prevent U.S. exports from getting to market. The crude will thus back up at storage terminals along the Gulf Coast and in Cushing, Oklahoma. The king of oil storage hubs, Cushing features vast tank farms with dozens of steel tanks. Cushing is currently filled to about 40 million barrels, according to government data, considerably below record levels of 69 million barrels held in 2017, and only about halfway to its theoretical max capacity of 76 million barrels. The market is dominated by operators like Magellan Midstream Partners, which has 13 million barrels of capacity at Cushing and 9 million on the Houston ship channel.
With oil spot prices so low right now, the market paradigm has been flipped. Under normal market conditions a barrel of oil in hand today is worth more than the promise of one in the future. But today the market is in “deep contango,” where traders can buy oil today at $25, sell it forward for delivery in two years at $40, use the premium to pay 50 cents per barrel per month for storage, and end up with a nice profit.
That trade could get even better if U.S. production is slow to fade away. Rystad’s oil markets analyst Paola Rodriguez-Masiu thinks that will need $10 per barrel or lower to trigger actual production shutdowns, while Fielden at Morningstar takes comfort that E&P companies have been faster to mothball rigs this time around, so output should fall more rapidly. Industry players will remember the pain and who inflicted it. “The timing and impulsive nature of the move could come to haunt the Kingdom,” wrote analyst Amrita Sen this week.
Housley Carr at RBN Energy noted this morning that however bad it gets, there will be an end. “At some point, if these market conditions continue for long enough, Cushing storage will fill to the brim too. And when that happens, the largest storage hub in the world and the delivery point for CME/NYMEX WTI futures will send price signals that enough is enough.”
