Oil producers scramble to find ‘creative’ storage options after historic price crash

KEY POINTS
  • The global public health crisis caused by Covid-19 has created an extreme demand shock in energy markets, with storage space — both onshore and offshore — rapidly filling up.
  • In the U.S., the country’s main delivery point in Cushing, Oklahoma is expected to reach maximum capacity by the end of May.
  • A “tsunami of shut-ins are coming,” Dan Pickering, chief investment officer at Pickering Energy Partners, said via Twitter on Wednesday.
GP: Dozens Of Oil Tankers Sit Off The California Coast As Demand For Crude Plummets During Pandemic 200430 EU
An aerial view shows a cruise ship (L) and tanker vessel anchored near the ports of Long Beach and Los Angeles amid the coronavirus pandemic on April 28, 2020 off the coast of Long Beach, California.
Mario Tama | Getty Images

An unprecedented collapse in oil demand has forced some producers to come up with “creative” measures in order to find places to store their crude, with one energy analyst describing the situation as like a “very elaborate game of hide-and-seek.”

It comes as the coronavirus crisis continues to hit energy markets hard, with the world awash with oil and quickly running out of places to put it.

As a result, U.S. West Texas Intermediate futures plunged below zero for the first time in history last week. Trading volume was thin given it was the day before the contract’s expiration date, but, nonetheless, the move lower was extraordinary.

On Thursday, the June contract of WTI traded at $17.20 a barrel, up more than 14%, while international benchmark Brent crude stood at $24.63, around 9% higher.

At the start of the year, WTI and Brent futures both fetched more than $60 a barrel.

“The U.S. crude benchmark is quickly gaining pariah status within the commodity sphere due to storage anxieties,” Stephen Brennock, oil analyst at PVM Oil Associates, said in a research note published Wednesday.

“Traders are dumping the June contract fearing a repeat of the May expiry should producers struggle again to find storage for their unwanted barrels.”

What storage options are available?

The global public health crisis caused by Covid-19 has created an extreme demand shock in energy markets, with storage space — both onshore and offshore — rapidly filling up.

In the U.S., the country’s main delivery point in Cushing, Oklahoma is expected to reach maximum capacity by the end of May.

Oil storage at the closely-watched Cushing hub rose by about 10% to reach 59.7 million barrels last week, according to data from the U.S. Energy Information Administration. That’s approximately 25 million barrels shy of its total working capacity.

GP: Trading Hub For Crude Oil In Oklahoma Gains Attention As Markets Turn Volatile 200430 EU
An aerial drone view of a crude oil storage facility on April 23, 2020 in Cushing, Oklahoma.
Tom Pennington | Getty Images

The Strategic Petroleum Reserve (SPR), the nation’s largest storage facility, has capacity for a whopping 713.5 million barrels of crude oil in its underground salt caverns along the Gulf Coast. But, as of mid-April, it already had 635 million barrels of crude stored, meaning it was 89% full.

“As a result, while the SPR can be helpful here, it is not a panacea for the industry,” Stewart Glickman, energy equity analyst at CFRA, said in a research note to clients.

The natural home for all crude oil is a refinery, but refiners must have places to store excess purchases of crude before they are processed.

Many producers have opted to store their crude in floating tankers. Last week, Reuters reported there were 160 million barrels of crude oil in floating storage on the ocean via crude oil tankers.

“The tankers have been hired, filled, and are simply floating around on the ocean, awaiting a recovery in demand,” Glickman explained, noting that the situation had also sent tanker rates “through the roof.”

An “even more creative solution” to the storage problem, he said, would be to repurpose so-called “frac tanks.”

A frac tank typically holds water or a chemical mixture known as frac fluid before it gets pumped into a new well that is being built.

“The low level of spending on new oil wells means that there are plenty of frac tanks sitting idle, but who says they can only hold frac fluids? What if, say, they could instead hold crude oil?” Glickman asked.

GP: SAUDI-RUSSIA-DIPLOMACY 200309 EU
Russian Energy Minister Alexander Novak and Saudi Energy Minister Abdulaziz Bin Salman sign documents during a ceremony following a meeting of Russian President Vladimir Putin with Saudi Arabia’s King Salman in Riyadh, Saudi Arabia, on October 14, 2019.
ALEXEY NIKOLSKY | SPUTNIK | AFP via Getty Images

“Each frac tank can hold about 500 barrels of oil. Given enough frac tanks, you could put together a small army of small-scale crude oil storage. These tanks can be moved to a wellhead and lined up like trailers in a trailer park.”

However, rental rates for frac tanks have also reportedly jumped by up to 33% in recent weeks and Glickman warned there was little reason for firms to be optimistic about alternative storage options.

“A more conservative approach would be to simply store the oil below ground (by shutting in the well) – which is where we think the industry is heading,” he concluded.

‘Tsunami of shut-ins are coming’

However, the process of shutting in wells is considered a risky business, since it can physically damage reservoirs and may threaten the prospect of reviving future output.

A “tsunami of shut-ins are coming,” Dan Pickering, chief investment officer at Pickering Energy Partners, said via Twitter on Wednesday.

He claimed that having spoken with many public and private companies, “they’ve got their plans and are starting to turn off volumes.”

“Not surprising,” Pickering said. “But evidence the ‘market’ works faster than government, regulators or OPEC+.”

OPEC and non-OPEC allies — sometimes referred to as OPEC+ — agreed on a new supply-cut deal from May 1 in an attempt to shore up the market.

The producer group plans to remove a record 9.7 million barrels per day from the energy market for May and June.

Other nations, including the U.S., have also indicated they would also be willing to pump less oil.

Oil prices jump as US crude inventories reportedly rise by less than expected

KEY POINTS
  • West Texas Intermediate for June delivery surged 14.1% to $14.08 per barrel. International benchmark Brent crude futures also added 4.15% to $21.31 per barrel.
  • The moves came after data from the American Petroleum Institute showed that U.S. crude inventories jumped by 10 million barrels in the week to April 24  —  to 510 million barrels, according to Reuters. That was lower than analysts’ expectations of a build of 10.6 million barrels, Reuters reported.
  • Oil prices swayed wildly on Tuesday between gains and losses as investors continue to keep an eye on depleting crude storage space amid a dearth in demand.
GP: Coronavirus Oil tankers woman in mask Long Beach CA
A woman wearing face mask walks on the ocean front while Oil tankers are seen anchored off the coast of Long Beach, California, after sunset on April 25, 2020.
Apu Gomes | AFP | Getty Images

Oil prices jumped in the afternoon of Asian trading hours on Wednesday following a report that showed a smaller than expected crude inventory build stateside.

West Texas Intermediate for June delivery surged 14.1% to $14.08 per barrel. International benchmark Brent crude futures also added 4.15% to $21.31 per barrel.

The moves came after data from the American Petroleum Institute showed Tuesday that U.S. crude inventories jumped by 10 million barrels in the week to April 24  — to 510 million barrels, according to Reuters. That was lower than analysts’ expectations of a build of 10.6 million barrels, Reuters reported.

Still, in a note dated April 28, Moody’s Investors Service said it was reducing its near-term oil price assumptions for WTI as well as Brent.

“Exceptionally weak short-term prices will persist until production drops enough to ease the strain on storage facilities already operating at or close to full capacity,” said Elena Nadtotchi, vice president and senior credit officer at Moody’s. “Significant supply adjustments in due course should help to balance the market later in 2020, but the pace of the market’s rebalancing and rising oil prices will depend on demand recovery.”

Moody’s price prediction for WTI is currently $30 per barrel this year, and $40 next year. For Brent, it sees prices averaging $35 per barrel in 2020 and $45 in 2021.

Oil prices swayed wildly on Tuesday between gains and losses as investors continue to keep an eye on depleting crude storage space amid a dearth in demand. The coronavirus pandemic, which has forced countries around the world to shut down their economies temporarily as people are told to stay home, has also effectively frozen major economies globally.

WTI for June delivery fell 4 cents, or 3.4%, to settle at $12.34 per barrel on Tuesday. International benchmark Brent crude, on the other hand, gained 47 cents, or 2.35%, to settle at $20.46.

— CNBC’s Pippa Stevens and Sam Meredith contributed to this report.

Oil drops more than 12%, extending Monday’s 25% decline

GP: Oil worker in Permian Basin 141212
A worker prepares to lift drills by pulley to the main floor of a drilling rig in the Permian basin.
Brittany Sowacke | Bloomberg | Getty Images

Oil prices fell more than 12% in Tuesday early morning trading, extending Monday’s nearly 25% decline on ongoing fears that storage around the world is rapidly filling.

West Texas Intermediate, the U.S. benchmark, slipped 12.75%, or $1.63, to trade at $11.15 per barrel, while international benchmark Brent crude traded 3.9% lower at $19.21 per barrel. On Monday, WTI fell 24.56%, or $4.16, to settle at $12.78 per barrel. International benchmark Brent crude fell 6.76% to settle at $19.99. Each contract is coming off its eighth week of losses in nine weeks.

The coronavirus pandemic has erased as much as a third of global demand for oil, according to some estimates, which has sent prices tumbling to record lows.

“The June contract is falling due to the reality of demand levels being well below current production levels and limited storage options,” Reid Morrison, PwC oil and gas advisory leader, told CNBC. “Choppiness in the markets will be significant as economies deal with lockdowns and returning to normal,” he added.

Prices were also pressured on Monday after the United States Oil Fund, which trades under the ticker ‘USO’ and is popular with retail investors, said it would sell all of its contracts for June delivery beginning Monday, in favor of longer-term contracts.

“The move [by the USO] is a recognition of the bleak prospects for the US oil sector in May and June,” said Cailin Birch, global economist at The Economist Intelligence Unit.

As demand drops more and more producers have announced production cuts. But some believe it won’t be fast enough to combat the unprecedented fall-off in demand from the pandemic.

Earlier in April, OPEC and its oil-producing allies agreed to a record production cut that will take 9.7 million barrels per day off the market beginning Friday, while Exxon and Chevron are among the U.S.-based companies that have scaled back operations.

But sill, Birch noted that even as crude prices have dropped U.S. oil production held at a record level in the first quarter of 2020, “filling up almost all available storage capacity.”

WTI and Brent are both on pace for their fourth straight month of losses for the first time since 2017.

Oil falls, June WTI leads losses on storage fears

CNBC

Reuters
KEY POINTS
  • U.S. West Texas Intermediate June futures fell $1.49, or 8.8%, to $15.45 a barrel by 0452 GMT.
  • Brent crude was down 44 cents, or 2.1%, at $21.00 a barrel.
GP: oil derrick
Pump jacks operate near Loco Hills on April 23, 2020 in Eddy County, New Mexico.
Paul Ratje | Getty Images

Oil prices fell on Monday on signs that worldwide oil storage is filling rapidly, raising concerns that production cuts will not be fast enough to fully offset the collapse in demand from the coronavirus pandemic.

U.S. oil futures led losses on fears that storage at Cushing, Oklahoma, could reach full capacity soon. U.S. crude inventories rose to 518.6 million barrels in the week to April 17, near an all-time record of 535 million barrels set in 2017.

U.S. West Texas Intermediate June futures fell $1.49, or 8.8%, to $15.45 a barrel by 0452 GMT, while Brent crude was down 44 cents, or 2.1%, at $21.00 a barrel.

Oil futures marked their third straight week of losses last week — and have fallen for eight of the past nine — with Brent ending down 24% and WTI off around 7%.

Retail investors were caught off guard last week when the May WTI contract plunged into negative territory for the first time ever two days before expiry as financial traders scrambled to avoid having to take delivery of oil.

The June WTI contract’s price fall may have been triggered by investors moving to later months to avoid a similar fate, said Tony Nunan, a senior risk manager at Mitsubishi Corp in Tokyo.

“Anybody who has had length who doesn’t have storage contracts has either closed their positions (in June) or rolled far forward … because it’s suicide to carry a position into the close after seeing what happened last month,” he said.

Cushing, the delivery point for WTI, was 70% full as of mid-April, although traders said all available space was already leased.

Producers may not be slashing output quickly or deeply enough to buoy prices, especially when global economic output is expected to contract by 2% this year, worse than the financial crisis, while demand has collapsed 30% due to the pandemic.

Amid the rush to cut output, rig counts in the United States are down to the lowest since July 2016, while the total number of oil and gas rigs in Canada has fallen to the lowest since at least 2000, according to Baker Hughes data.

“The Permian Basin and New Mexico accounted for 62% of the shutdowns; an ominous sign considering this region has been one of the more prosperous in the U.S.,” ANZ analysts said.

Kuwait and Azerbaijan are coordinating cuts, while Russia is set to reduce its western seaborne exports by half in May.

The Organization of the Petroleum Exporting Countries and its allies including Russia, a group known as OPEC+, pledged earlier this month to cut output by an unprecedented 9.7 million barrels per day in May and June.

Oil prices extend rebound on output cuts, still set to end tumultuous week in the red

CNBC

Reuters
KEY POINTS
  • Brent crude was up 60 cents, or 2.8%, at $21.93 by 0133 GMT, having climbed 5% on Thursday.
  • U.S. oil gained 66 cents, or 4%, at $17.16 a barrel, after surging 20% in the previous session.
GP: Oil rig offshore platform Oil Prices Trade In Negative Numbers For First Time Amid Global Oil Glut
Offshore oil platforms are seen on April 20, 2020 in Huntington Beach, California. Oil prices traded in negative territory for the first time as the spread of coronavirus (COVID-19) impacts demand.
Michael Heiman | Getty Images

Oil prices rose on Friday, gaining further ground as some producers like Kuwait said they would move to cut output swiftly to try to counter the evaporation in global demand for fuels caused by the coronavirus pandemic.

Brent crude was up 60 cents, or 2.8%, at $21.93 by 0133 GMT, having climbed 5% on Thursday. U.S. oil gained 66 cents, or 4%, at $17.16 a barrel, after surging 20% in the previous session.

But barring a sharper jump on the last trading day of the week, prices are heading for their eighth weekly loss in the last nine — one of the most tumultuous weeks in the history of oil trading, with U.S. West Texas Intermediate falling into negative territory to minus $37.63 a barrel on Monday, while Brent thudded to a two-decade low.

“The disruption relating to the coronavirus is set to cause the steepest fall in global GDP since the Second World War,” Capital Economics said in a note, forecasting a 5.5% contraction in global economies this year, dwarfing the 0.5% fall seen during the global financial crisis.

“Once the virus is under control output should rebound, but it will take years to return to its pre-virus path,” it said.

Under a deal agreed between the Organization of the Petroleum Exporting Counties (OPEC) and associated producers like Russia, a grouping known as OPEC+, production cuts equal to 9.7 million barrels of oil per day are due to kick in from May.

But Kuwait’s state news agency KUNA said on Thursday the producer will begin cutting supplies to international markets without waiting for the official start of the OPEC+ deal.

Meanwhile Azerbaijan’s Azeri-Chirag-Guneshli oil project will have to cut output sharply from May onwards as the oil producer fulfills its commitments under the deal to cut production, four sources told Reuters.