Room in storage

Jan. 5, 2015
Rapid growth of oil stocks-a physical manifestation of the surplus that began crushing crude prices in mid-2014-raises a question: How much empty space exists in which to store oil?

Rapid growth of oil stocks-a physical manifestation of the surplus that began crushing crude prices in mid-2014-raises a question: How much empty space exists in which to store oil?

Inventories of oil grew rapidly last year in the industrialized countries represented by the Organization for Economic Cooperation and Development. According to the International Energy Agency's December Oil Market Report, stocks rose in 9 of the 10 months following their recent low in December 2013. During that period, inventories expanded by 154 million bbl.

While oil products dominated inventory growth through much of 2014, crude stocks in October surged by 34.4 million bbl against a seasonal products decline of 30.7 million bbl in a period of peak refinery maintenance.

Continuing gush

The gush into storage will continue unless the supply rate falls below forecast levels, or the consumption rate exceeds expectations, or both.

Future inventory changes can be inferred from IEA projections for global demand, supply from outside the Organization of Petroleum Exporting Countries, and OPEC production of NGL. IEA doesn't project crude production by OPEC members.

If IEA's forecasts come true and OPEC members collectively produce at their target rate of 30 million b/d, market balance requires inventory growth averaging 1.4 million b/d in the first quarter of 2015 and 1.9 million b/d in the second.

Those are unusually high inventory build rates. They would create first-half additions to stocks totaling 297 million bbl. Whether capacity exists to hold the additional oil is a question with no precise answer.

Part of the problem is that consistent inventory numbers are available only for the OECD, which requires members to report them. Oil in storage outside OECD countries never is accurately known. And OECD data cover only primary stocks, which exclude the considerable but unmeasured storage of final users.

For storage capacity itself, moreover, a larger problem bedevils estimates.

"There is no centralized, systematic, and comprehensive collection of storage capacity data for the entire OECD, let alone for the world as a whole," IEA said in December.

The agency resorted to "an imperfect proxy" by comparing current OECD inventories with recent peak levels. The method neither indicates capacity utilization when stocks reached those levels nor accounts for subsequent capacity changes.

But it provides a gauge against which to assess whether the system can accommodate the anticipated first-half stock build, which if distributed evenly between countries in and outside the OECD, would push the OECD total to a record-high 2.869 billion bbl by midyear.

According to IEA total OECD stocks in October was 97% of the maximum level recorded during 2000-14. By that gauge, inventories were fuller in the OECD Americas, where the share was 100%, than in OECD Europe (87%) and OECD Oceania (86%).

In North America, IEA notes, stocks at the end of October were 1.6 million bbl below their reported peak of 1.41 billion bbl a month earlier. But that comparison doesn't account for construction of storage facilities stimulated by production growth in the US and Canada.

Working storage capacity in the US, the only OECD member collecting data on the subject, has increased by 32 million bbl in the past year to a total of 2 billion bbl, according to IEA. Total oil stocks thus represent 60% of storage capacity, IEA calculates. Crude inventories are at 75% of working capacity.

In Europe, closed refineries have been converted to terminals and storage capacity is being added to accommodate growing imports of long-haul oil.

Second-half test

On balance, IEA says, "there is a fair amount of land-based storage capacity in both Europe and Asia Oceania to be filled before market participants would need to resort to more-expensive floating storage."

Continuation of a strong stock build into the second half of the year, however, "would likely test capacity limits."

For more on inventories and other puzzles of the oil market, see the Forecast & Review report, beginning on p. 26.