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By Robert Rapier on Jul 2, 2015 with 6 responses

Remember When We Were Running Out of Crude Oil Storage?

Given the amount of air time the crude oil storage situation received back in March and April, this might be a good time to revisit that situation. If you recall, there was a great amount of hand-wringing regarding the crude oil storage picture in the U.S. Inventories were high and they were continuing to rise. There were a great many articles like this one, which assured us the situation was dire: 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.”

Speculators began to bet that the price of oil was going to crash. Typical was this one at Seeking Alpha: Why Crude Oil Prices Will Have To Fall Hard.

I don’t usually write “I told you so” articles, but given the amount of flack I took from certain quarters, I am going to make an exception.

I gave a number of interview and wrote a number of articles explaining why these chicken little scenarios were wrong. On March 11th, I wrote Is the U.S. Running Out of Crude Oil Storage? I answered that question “No, despite the popular narrative that we keep hearing, the U.S is not running out of crude oil storage.” I went on to explain the reasons that crude oil inventories were rising, and then followed that article up with Crude Oil Inventories Should Peak Soon.

I explained that those who were betting on a crude oil price crash — and you may recall there were numerous prognosticators predicting exactly that — were not seeing the entire picture. At that time, oil was trading in the mid-$40s. I argued that it was likely to move up, not down as many had predicted. One prominent analyst said that I didn’t seem to understand what was going on and that those calling for a price crash were correct.

So what happened?

This week broke a streak of 8 straight weeks of inventory declines after crude oil inventories peaked the last week of April. Crude oil prices moved above $60/bbl, but have since weakened back to the upper $50′s in response to the Greek monetary crisis. Those predicting $20/bbl or $30/bbl have gone mostly silent.

So what will happen next? Inventories are still historically high, and toward the end of summer demand will decline. But domestic supply is also showing signs of peaking in response to soft prices. While production is still rising, it is doing so at a slower pace, and inconsistently. We are now seeing weekly declines on a fairly regular basis. Inventories are likely to remain high for some time, but ultimately declines in domestic production will start to draw them back down. I think oil will likely continue to trade in a range of $50 to $70 as I have predicted for several months.

The situation in Greece is a wild card though. It has the potential to cause havoc in the financial markets, in which case oil prices will probably take a haircut. I will continue to monitor the situation closely, and hopefully next week I can start to report on the recently released BP Statistical Review.



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Link to Original Article: Remember When We Were Running Out of Crude Oil Storage?

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  1. By Aj on July 2, 2015 at 6:29 pm

    Good article. Couple of points to consider…

    1. The primary reason we didn’t fill Cushing was not because of slowed production or increased demand – it was because we were shipping it up to Canada through a loophole in our export laws. Additionally, it was being stored in tankers offshore.

    2. Over the last 8 week demand has picked up a little, while production has increased by US shale producers and OPEC. Why was there a draw in stocks? Mainly forest fires in Alberta. A very high percentage of our oil comes from Canada. This has artificially given us a sense of hope that things are not as bad as they actually are.

    3. Yes, Greece is not that big of a deal when it comes to oil. Yes, euro taking a hit and the dollar getting stronger will drive WTI down but the Iran dealings are much more of an issue. Specifically, they have 35+ (estimate) million barrels of crude coming this way that have been floating at see. As soon as the deal goes through they will look to unload that cargo at any cost. All around the time refineries shut for seasonal maintenance.

    When you consider these points, there is a strong possibility that we might see the thirties in Q3/Q4. Especially with Iraq pumping out at such high levels now.

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    • By Robert Rapier on July 3, 2015 at 1:12 am

      Yeah, I meant to mention Iran. I was rushing to write this in an airport before my plane boarded and forgot to mention it.

      I do see a lot of potential weakness in price over the next 6-12 months, but since everyone knows that the $30s isn’t sustainable, I don’t think we will see the $30s.

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  2. By rlhailssrpe on July 3, 2015 at 9:42 am

    Does storage calculations include tankers on the high seas? This is a soft number as it is transportable, not static, thus can change with destination. And what percentage of national inventory would this “storage” comprise?

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    • By Robert Rapier on July 4, 2015 at 12:00 pm

      No, they don’t. These numbers are specific to the U.S., and most of the floating storage is international.

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  3. By Mike Varengas on July 7, 2015 at 6:58 am

    High inventory is a traditional signal to shifts in prices – basic economic theory. What I find curious is the amount of that oil drilled in the US compared to imported?

    There are different costs allocated to each method of retrieving oil. Adding trasportation, the costs can balloon to whooping figures.

    A strategic point as well. Buying other countries’ oil as opposed to using homeland supplies is a viable option mainly because fossils are running out. Imagine 50 years from now the US is the only country in the world having oil. Would that give the US some extra power and authority economy and military-wise? You bet!

    Greece is indeed tricky. It is not a large enough country (or economy) to matter on a global scale so much as the problem they have concerns the EU very intimately. EU does not want them out, that would spell disasterous as other countries like Portugal and Spain are in a similar situation to Greece, though not as severe. Greece does seem bend over and pay up either so it’s a peculiar stalemate. We are yet to see what happens to the $ and the oil price, I expect both to take a swing, probably in different directions.

    Mike,
    garbage control and recycling specialist

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  4. By Ben on July 9, 2015 at 3:21 pm

    Yes, count on modestly declining demand in tandem with modest reductions in output which may temper any presumptive decline in prices. The world economy still very much runs on “old energy” and that remains the case for the next decade and beyond. The prospects of fairly stable energy costs may help the monetary authorities in their efforts to keep our financial house of cards from collapsing. One uses “may” quite advisedly here. Renewables are moving at a glacial pace notwithstanding unprecedented subsidies and tireless advocacy by self-interested parties let alone that of progressive-minded types. The bottom-line benefits of energy efficiency typically outweigh actual returns (vice those projected by the IPO hustlers) of many alternative energy ventures. We would do well to promote greater “bang for the buck” of efficiencies in the slim hope that we might actually acknowledge that a kilowatt saved is a kilowatt earned.
    Hey, RR, thanks for the insights. And don’t blush for simply reminding some of us that you called it right along the way.
    Ben G.

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