May 25, 2010 [Houston Chronicle] – Even as oil prices inch above $30 a barrel, U.S. producers waiting for a better return are finding that storage has become its own valuable commodity that in short supply could erase crude’s recent gains.
The coronavirus pandemic and stay-at-home orders wiped out demand for crude oil and its refined products such as gasoline, diesel and jet fuel. The resulting global oil glut quickly filled storage tanks, creating a crisis that plunged oil prices into negative territory and forced producers to find different ways to store their product.
Companies that didn’t have access to massive storage tanks at trading hubs such as Cushing, Okla., are using temporary tanks in places like the Permian Basin of West Texas or are paying tens of thousands of dollars a day to store oil aboard supertankers anchored in the Gulf of Mexico.
“Storage rates are higher than normal, but it’s either pay up or shut in production — that’s the reality we’re living with now,” said Bruce Fulin, vice president of the commodity price service Argus.
There are about 650 million barrels of working crude oil storage capacity in the United States, and it’s 62 percent full, according to figures from the U.S. Energy Information Administration.
Nearly 403 million barrels are stored at refineries and tank farms while an additional 129 million barrels are in pipelines, rail cars and barges, the agency reported.
The storage crunch is more pronounced at the Cushing hub, the delivery point for West Texas Intermediate, the U.S. benchmark, and much of the oil produced in the U.S. There are 76 million barrels of crude oil storage capacity, and tanks are 79 percent full, EIA data shows.
Though the tanks aren’t full, fears of a looming storage crunch were one of the factors that plunged the price of West Texas Intermediate to an unprecedented negative-$37.63 in April.
“This negative price was not a purely paper anomaly,” Mizuho Bank oil industry analyst Paul Sankey said. “It was the reality of paper markets meeting physical markets and the last holders of the May contract for crude being unable to get out of their ultimate requirement to take delivery of crude at landlocked Cushing, Okla.”
Anthony Starkey, a crude oil price and storage expert with the energy and commodities information service S&P Global Platts, said pipeline and storage tank operators will feel the most acute pressure this month and next.
Platts estimates that there is space for 60 million barrels in commercial oil storage tanks across the U.S., and with an expected 34 million barrels of cheap Saudi Arabian oil headed to the Gulf Coast for delivery in May and June, Starkey said that only leaves less than 30 million barrels of storage for U.S. producers.
“Without the use of floating storage or increased exports, U.S. tanks will fill rapidly,” Starkey said. “And if they fill up, prices would be pressured again.”
But some relief might be at hand, as manufacturers and oil field service companies offer temporary storage products and services to producers.
Houston oil field services company Gravity recently announced that it has 5,000 storage tanks that can hold 500 barrels each and that can be hauled to a production site on a flatbed truck.
Wyoming-based Well Water Solutions and Houston-based Select Energy Services are renting and selling storage tanks that resemble giant above-ground swimming pools.
In Texas, Well Water Solutions is renting four temporary storage tanks that hold 60,000 barrels each to a pair of oil companies with wells near Midland. Rents vary based on volumes and the lengths of leases, but they average 45 cents for a year, company President Sean Lovelace said.
Midland-based Source Rock Midstream is working to add liners to wastewater and freshwater tanks that will allow them to store crude oil until prices pick up, the company’s president Ben Samuels said.
“We’re looking at a unique situation that we’ve never seen before, and we all have to figure out how to survive and get to the next phase,” Samuels said.
Some oil companies such as San Antonio-based TerraFina Energy are already using onsite storage. Pipeline companies stopped taking deliveries from TerraFina’s wells, prompting the company to throttle back production and store oil at tanks that were already next to the wells, founder and CEO Marsha Hendler said.
“I’ve got enough storage where I can last three or four months,” Hendler said. “If I just pump one day a week, I may be able to last longer. I can also program it to slow down and just pump for a couple hours a day.”
Storage tanks next to oil wells may buy producers more time, especially at low-producing wells. But state officials don’t keep track of the number of these tanks in the oil fields or how much oil they can hold.
And while temporary storage is being deployed in the oil fields, tens of millions of barrels of crude are being stored aboard tankers in the Gulf.
Ship tracking service ClipperData says there are 20 oil tankers that have been anchored in the Gulf for than more than seven days. With a capacity of 1 million to 2 million barrels of oil, those ships could be holding 40 million barrels at sea until prices improve.
But renting a tanker that can hold 2 million barrels can cost $76,000 to $100,000 per day, according to Argus. Large companies such as Shell, Hess and Occidental Petroleum can charter the supertankers to store U.S. oil bound for export, while smaller companies use smaller tankers at lower rates.
“These are high prices for crude vessels,” Argus’ Fulin said. “And because there are fewer of them available and the owners know that, prices go up. For the next couple months, they will see vessel charter rates being very strong.”
U.S. crude inventories, meanwhile, are still rising but at a slower rate as oil companies cut their output more quickly than anticipated, Starkey said, providing a little breathing room.
“We now expect that we will stay below global tank tops,” said Starkey of Platts. “We will squeak by.”
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