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.

Meltdown in oil continues as Brent plunges 14%

KEY POINTS
  • In the afternoon of Asian trading hours, international benchmark Brent crude futures dropped 14% to $16.55 per barrel.
  • Meanwhile, the June contract for West Texas Intermediate shed all of its earlier gains as it fell about 6% to $10.82 per barrel.

Oil prices continued to plummet Wednesday as concerns over limp demand and limited remaining storage capacity lingered.

In the afternoon of Asian trading hours, international benchmark Brent crude futures 14% to $16.55 per barrel. Meanwhile, the June contract for West Texas Intermediate shed all of its earlier gains as it fell 6% to $10.82 per barrel. The July contract for WTI dipped and last traded below $19 per barrel.

Per Magnus Nysveen, senior partner and head of analysis at Rystad Energy, warned that the situation in the oil markets is “going to be worse.”

“The world is running out of place to store the oil,” Nysveen told CNBC’s “Street Signs Asia” on Wednesday, adding that storage acts as “a kind of buffer.”

“When the supply and demand balance is positive or negative, then you can build or draw from storage,” he said. “But when the storage gets full, then there is no buffer for this very strong imbalance that we’re seeing.”

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

Pictet Wealth Management’s Jean-Pierre Durante agreed with Nysveen’s assessment of the situation, commenting in a Wednesday note that the “world is overflowing in oil” despite a recent decision by the Organization of the Petroleum Exporting Countries and its allies — known collectively as OPEC+ — to cut oil supply.

“World storage capacity will rapidly reach saturation point,” said Durante, who is head of applied research at Pictet Wealth Management.

Global demand for oil has fallen dramatically, with major economies worldwide effectively frozen as a result of coronavirus-induced lockdowns imposed by authorities scrambling to contain the spread of the disease.

Wednesday’s moves in oil followed recent sharp declines in the sector. The May contract for WTI, which expired Tuesday,  plunged below zero for the first in history before clawing its way back into positive territory. The June WTI contract plunged more than 40% on Tuesday while international benchmark Brent dropped from levels above $24 per barrel.

Oil mixed as shrinking China economy overshadows Trump plan to ease US coronavirus lockdown

CNBC

Reuters
KEY POINTS
  • Brent was up by 55 cents, or 2%, at $28.37 a barrel by 0406 GMT, while U.S. crude for May delivery, which expires on April 21, was down 13 cents, or 0.7%, at $19.74 a barrel.
GP: Oil Pumping Jacks
Oil pumping jacks, also known as “nodding donkeys”, operate in an oilfield near Almetyevsk, Tatarstan, Russia, on Wednesday, March 11, 2020.
Andrey Rudakov | Bloomberg via Getty Images

Oil prices were mixed on Friday after the weakest Chinese economic data in decades showed the impact of the coronavirus pandemic, offsetting some earlier gains on optimism for President Donald Trump’s early plans to revive the U.S. economy.

Brent was up by 55 cents, or 2%, at $28.37 a barrel by 0406 GMT, while U.S. crude for May delivery, which expires on April 21, was down 13 cents, or 0.7%, at $19.74 a barrel. The more active June contract was up $1, or 4%, at $26.53.

China’s economy shrank for the first time since at least 1992 in the first quarter, as the coronavirus outbreak paralysed production and spending and punched a huge hole in global demand for crude and refined products.

That data was released after Trump laid out a three-stage process for ending lockdowns to stop the spread of the coronavirus that has now killed more than 32,000 Americans and nearly 140,000 worldwide.

“Oil markets found baseline support from President Trump’s U.S. reopening plan,” said Stephen Innes, market strategist at AxiTrader. Still, downside risk remains the dominant factor, he said.

Both oil benchmarks are heading for a second consecutive week of losses, with U.S. oil around 18-year lows: Analysts have slashed forecasts for prices and demand due to the spread of the coronavirus and oversupply concerns.

The Organization of the Petroleum Exporting Countries (OPEC) lowered its forecast for 2020 global oil demand and warned it may not be the last revision downward. OPEC now sees a contraction of global demand of 6.9 million barrels per day (bpd), compared with a small increase predicted last month, due to the coronavirus outbreak.

“Downward risks remain significant, suggesting the possibility of further adjustments, especially in the second quarter,” OPEC said of the demand forecast.

OPEC and other producers including Russia, in a grouping known as OPEC+, over the weekend agreed on production cuts of nearly 10 million bpd, after an earlier cooperation agreement collapsed.

ConocoPhillips said on Thursday it will reduce planned North American output by 225,000 bpd, the largest cut so far by a major shale oil producer to deal with the unprecedented drop in demand.

“This highlights that the market will see meaningful cuts from outside the OPEC+ group without the need for mandated cuts,” said ING bank in a note on Friday. “Instead, market forces will do the job, with the low price environment forcing producers to cut back.”

Still, even allowing for another 10 million bpd of cuts supposed to come from producers like the United States and Norway due to weak prices, there is still a mismatch between supply and demand of around 10 million bpd, most analysts say.

Oil gains as US shale production set to fall sharply

CNBC

Reuters
KEY POINTS
  • Brent futures rose 53 cents, or 1.7%, to $32.27 a barrel by 0420 GMT after settling 0.8% higher on Monday.
  • U.S. West Texas Intermediate (WTI) crude was up 32 cents, or 1.4%, at $22.73, having dropped 1.5% the previous session.
GP: Russian oil field 200401 ASIA
Oil pumping jacks, also known as “nodding donkeys,” operate in an oilfield near Almetyevsk, Tatarstan, Russia, on Wednesday, March 11, 2020.
Andrey Rudakov | Bloomberg | Getty Images

Oil prices rose more than 1% on Tuesday after the main U.S. energy forecasting agency predicted shale output in the world’s biggest crude producer would fall by the most on record in April, adding to cuts from other major producers.

Brent futures rose 53 cents, or 1.7%, to $32.27 a barrel by 0420 GMT after settling 0.8% higher on Monday. U.S. West Texas Intermediate (WTI) crude was up 32 cents, or 1.4%, at $22.73, having dropped 1.5% the previous session.

The Organization of the Petroleum Exporting Countries, along with Russia and other producing countries — known as OPEC+ — agreed over Easter to cut output by 9.7 million barrels per day (bpd) in May and June, equal to about 10% of global supply before the viral outbreak.

The United States, the world’s biggest producer, is reducing output as well, and other countries are taking the estimated cut in production to about 19.5 million bpd.

But analysts, oil industry executives and others say no matter how the numbers are massaged, the reduction will not be enough to match a contraction of around a third of global oil demand due to the outbreak.

Oil prices are still down by over 50% so far this year.

“We are at the point right now where the demand destruction is so far beyond anything they are going to do in any coordinated cut,” said Greg Priddy, director global energy and Middle East at Stratfor in Houston.

Inventories, where available, are expected to fill up fast even as some countries among the G20 agreed to buy oil for their national reserves.

“Russia doesn’t have a lot of storage capacity and the capacity in Europe is going to be full,” Priddy said.

Still, U.S. production is falling in tandem with a drop in prices and there are signs the coronavirus outbreak may have peaked in some areas of the world.

Already there are signs in China, where the virus started and is now largely under control, that demand has returned with data showing that crude oil imports rose 12 percent in March from a year earlier.

Still, U.S. shale oil output is expected to have the biggest monthly drop on record during April, the U.S. Energy Information Administration (EIA) said on Monday.

Production has been sliding for several months, but the declines are expected to accelerate sharply in April with a loss of nearly 200,000 bpd of production, the EIA said.

That would bring shale oil output, which has been the driver of the sharp growth in U.S. production, to 8.7 million bpd.

Numerous U.S. producers, including majors like Exxon Mobil and Chevron, have said they will cut spending and expect to produce less crude in the coming months.

The losers — and even bigger losers — of an oil price war between Saudi Arabia and Russia

KEY POINTS
  • Most energy analysts have dismissed the idea that Saudi Arabia and Russia’s price war has been specifically designed to target U.S. shale, but the industry is expected to bear the brunt of the pain.
  • Some believe the worst hit from a sharp drop in oil prices will be long-time allies of de facto OPEC leader, Saudi Arabia.
  • “Even at $30, something is going to happen … We are not going to stay here. We can’t,” Chris Weafer, a senior partner at Macro-Advisory, told CNBC.
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

An intensifying oil price war between Saudi Arabia and Russia has created “very painful” market conditions for the world’s largest crude producers, analysts have told CNBC, with many braced for sliding revenues over the coming months.

International benchmark Brent crude traded at $34.23 Thursday morning, down over 4.4%, while U.S. West Texas Intermediate (WTI) stood at $31.64, around 4% lower. Oil prices have almost halved since the start of the year.

The downturn for crude futures comes shortly after talks between OPEC kingpin Saudi Arabia and non-OPEC leader Russia broke down.

Markets had been hoping for an agreement between Riyadh and Moscow, as well as other OPEC and non-OPEC producers, in order to deepen oil output cuts and prop up prices.

The group’s unexpected failure to reach a consensus on production policy led oil prices to crash on Monday.

President Donald Trump’s surprise announcement Wednesday to ban travel from continental Europe following the WHO’s declaration that the coronavirus can now be described as a pandemic also acted as a catalyst for further oil price losses Thursday morning.

What does a price war mean for US shale?

Most energy analysts have dismissed the idea that Saudi Arabia and Russia’s price war has been specifically designed to target U.S. shale, but the industry is expected to bear the brunt of the pain.

Securing America’s Future Energy (SAFE), a think tank that advocates for reducing U.S. dependence on oil, believes the American oil industry is the loser from the current price war.

“Saudi Arabia claims to be the swing producer to stabilize the market, but mostly they just cause swings that hurt the free market and the ability to compete,” Robbie Diamond, president and CEO of SAFE, said via email shortly after OPEC and non-OPEC allies failed to reach an agreement.

“Our industry and the U.S. economy has no choice but to watch once again as Saudi Arabia tanks the price of oil to suit its domestic priorities,” he added.

Premium: A Shale-Oil Boomtown As Oil Bust Proves To Be Good
A pumpjack operates above an oil well at night in the Bakken Formation on the outskirts of Williston, North Dakota, U.S., on Thursday, March 8, 2018.
Bloomberg | Bloomberg | Getty Images

Trump initially welcomed the declaration of a price war between Saudi Arabia and Russia, hailing lower oil prices as good news for U.S. consumers.

Saudi Arabia has since signaled its intent to flood the market with crude, unveiling plans Wednesday for state-owned Saudi Aramco to ramp up production to 13 million barrels per day (bpd).

It is thought such a move could prompt a wave of bankruptcies and investment cuts in the U.S. which, in turn, would have a noticeable impact on shale production.

IEA says OPEC allies are in a ‘very, very difficult situation’

Some believe the worst hit from a sharp drop in oil prices will be long-time allies of de facto OPEC leader, Saudi Arabia.

“My main worry today is not on shale,” Fatih Birol, executive director of the International Agency (IEA), told CNBC’s Steve Sedgwick earlier this week.

“It is mainly on some of the major oil-producing countries who have not — despite the calls from the IEA many, many times — diversified their economies.”

Birol suggested countries like Iraq, Algeria and Nigeria — all OPEC producers — were in a “very, very difficult situation” and would require support from the rest of the world.

“They are facing major fiscal strains. Many of them will have difficulties to pay the salaries for the public sector, spending for health, for education, which in turn may provide social pressures in those countries.

Iraq, OPEC’s second-largest producer, is thought to be particularly exposed to an all-out price war because it has one of the least diversified economies of the producer group — despite relatively low production costs.

Iraq’s oil ministry said Tuesday that it will keep in touch with other OPEC and non-OPEC members in an effort to prevent an oil price collapse, Reuters reported.

What about the instigators of the price war?

Shortly after talks broke down with Saudi Arabia late last week, Russia claimed it could withstand lower oil prices for as long as a decade.

Yet, while many believe Moscow is in much stronger financial position to cope with a protracted period of lower oil prices than in previous years, it is not thought to be in the best interests of Russia or Saudi Arabia.

“If you assume that the price difference between agreeing and rejecting last week’s recommendation is $25 (a barrel) then Russia stands to lose a considerable amount of money by not endorsing the proposal,” Tamas Varga, senior analyst at PVM Oil Associates, said in a research note.

“There will come a point when the negative consequences of Russia’s decision will become unbearable for the instigator,” he added.

On Tuesday, Russian Energy Minister Alexander Novak appeared to keep the door open for Moscow and Riyadh to return the negotiating table in order to stabilize markets.

Chris Weafer, a senior partner at Macro-Advisory, told CNBC’s “Squawk Box Europe” on Tuesday that a reaction from the world’s second and third-largest oil producers would be inevitable.

“Even at $30, something is going to happen. The Saudis are going to have to do something because they need a higher price. The U.S. shale industry cannot afford that low price.”

“We are not going to stay here. We can’t,” Weafer said.