March 25, 2020 [Alaska Journal – Published on March 24, 2020] – As Saudi Arabia and Russia — and even U.S. shale producers — pump more oil than the world needs, the price for crude is dropping while the price for storing all that excess oil is rising.

There are worries that demand for storage will overwhelm capacity.

“I don’t see how you don’t exhaust global storage capacity, if this goes on until summer at the production numbers talked about,” Jeffrey Currie, head of commodities research at Goldman Sachs Group told Bloomberg.

“We believe … the market will soon come to realize that it may be facing one of the largest supply surpluses in modern oil-market history in April,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy, an Oslo-based research and business intelligence company.

Until supply and demand come back into balance, the oil will keep stacking up worldwide. Traders and buyers are storing cheap crude for consumption when they need it later, or in hopes of an eventual profitable resale.

The price for a barrel of Brent, the global benchmark crude (which North Slope oil tracks), has crashed from about $68 at the start of the year to about $28 at the start of trading March 23 as Russia and Saudi Arabia out-produce to see which one wins.

Global supply was already expected to exceed demand this quarter by 3.5 million barrels per day, according to the International Energy Agency. And that number will get a lot bigger after March 31, when OPEC member nations further boost their output as production limits expire.

“We could have global market oversupply of over 10 million barrels per day. Which is insane and unprecedented,” Abhi Rajendran, director of research at Energy Intelligence, told CNBC on March 16.

IHS Markit, a global energy research and analysis firm, forecasts the same oversupply of up to 10 million barrels per day, adding as much as 1.3 billion barrels to storage by the end of June.

Bloomberg has an even bigger number. If the market fight between Russia and OPEC continues, and the COVID-19 world economic collapse extends into later in the year, Bloomberg calculated that global crude inventories could grow by 1.7 billion barrels.

Don’t look for Saudi-led OPEC to blink first.

“Any large political power sometimes needs to remind its adversaries and competitors of its might. We believe Saudi Arabia seeks to teach the market a lesson,” Rystad’s Tonhaugen said in a posting on the company’s website March 18.

Global oil storage could fill up within four months, Antoine Halff, the chief analyst of Paris-based consultancy Kayrros, told The Wall Street Journal. Kayrros tracks global storage by using satellite imaging.

About 65 percent of the world’s total 5.7 billion barrels of oil storage is currently in use, according to Kayrros. At current fill rates, oil could reach the top of the tanks and caverns in just over a year, the company estimates.

“The fill rate that we are experiencing now is totally unprecedented,” Halff said.

The oil hub in Cushing, Oklahoma, is home to about 15 percent of the U.S. commercial storage capacity, or almost 80 million barrels. The tanks were about half full a week ago — and filling up. Storage rates at Cushing doubled over the past month and were running as high as about 50 cents per barrel per month, Reuters quoted two traders.

“Everyone and their mother is scrambling to fill up tankage,” a trader said.

The federal government’s Strategic Petroleum Reserve in salt caverns in Texas and Louisiana can hold about 750 million barrels and was storing about 635 million barrels as of early last week. Though 115 million barrels may sound like a lot of spare capacity for U.S. shale oil production, it’s not.

About two-thirds of the Strategic Petroleum Reserve capacity is designated for sour crude — with a sulfur content greater than 0.5 percent. But the crude pumped from the shale rock of West Texas and other shale basins has very low concentrations of sulfur, if any, and the sweet crude is not suitable for blending with sour crude.

Different caverns are designated for the different crudes. The caverns for low-sulfur, or sweet crude, had room a week ago for about 25 million barrels, while the sour-crude caverns had room for an additional 95 million barrels.

Other countries, notably South Korea, also have large onshore oil storage tank farms. But those are filling up, too, pushing traders and buyers to look to sea to park their crude.

Reuters reported March 10 that tanker rates are surging as traders need a place to store their cheap oil.

The cost of renting a very large crude carrier, or VLCC, which can hold 2 million barrels of crude, was quoted March 10 at more than twice what it was a month ago, ship brokers told Reuters. Other news sources were reporting even steeper rate hikes last week.

“We are seeing several deals being negotiated for short-term (6 to 12 months) charters. … The fall in oil prices has made floating storage more attractive, although the margins are still relatively thin,” shipbroker and consultancy Poten &Partners said in a research note.

The margin being whether buyers can pay the costly storage fees and still turn a profit.

As the charter rate climbs for the biggest ships — whether for storage or to deliver cheap Middle East crude to refineries — a growing number of Asian oil buyers are looking to smaller vessels to save money. Bloomberg reported that the rate hikes for smaller tankers were much less than the boost in VLCC rates.

Too much oil and not enough capacity to move it to market has been a growing problem in landlocked Alberta, with its growing oil sands production is outpacing the ability to get new pipelines built.

The provincial government has been limiting oil production the past year in an effort to hold down oversupply and boost prices, and now says it might mandate further cuts if rising supplies and falling prices threaten the survival of companies.

Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide. He is the Atwood Chair of Journalism at the University of Alaska Anchorage School of Journalism and Public Communication.

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