Last month, the EIA (Energy Information Administration) released a bi-annual statement showing crude and petroleum product inventories. Despite the fact that inventories are showing signs of declining recently, the fact of the matter is that they are still near their all-time highs and this is likely one of the largest contributors to oil having a tough time climbing above $50 per barrel. With this in mind, I decided that it would be a wise idea to look at overall inventories and discuss what the picture looks like and how this impacts investors in companies like Memorial Production Partners (NASDAQ:MEMP), Approach Resources (NASDAQ:AREX), and Legacy Reserves (NASDAQ:LGCY), as well as for those in the United States Oil ETF (NYSEARCA:USO) and other oil-related ETFs.
Crude capacity has increased significantly
One thing I noticed that is of particular interest is the fact that crude oil capacity has been on the rise. Over the past six months, the amount of crude capacity for commercial locations is estimated to have risen by 34.30 million barrels, climbing from 551.21 million barrels to 585.51 million. At the refinery level, we actually saw a net decrease but it was truly modest. However, if you look at tank farms, the level has been rising at a nice clip. During this timeframe, commercial capacity in tank farms across the U.S. have grown by 35.31 million barrels from 399.66 million barrels to 434.97 million.
There's no denying that this is a tremendous move higher (6.2% in a six month timeframe) but it's difficult to tell what caused it. On the one hand, you can argue that the EIA's prior data may have been inadequate but a more likely reason, in my mind, is that the large degree of contango that existed during the worst of the downturn incentivized the creation of storage space for traders and businesses to stock up on. Either way, with crude storage, after taking out pipelines and other transit-oriented crude, we can see that crude tanks across the nation are just 66.6% full as of the time of this writing. This suggests that we are sitting in a pretty decent spot at the moment and don't need to worry about tanks filling up anytime soon.
A similar picture across the board
This is fine and all, but in order to understand the entire domestic picture, we need to be aware of the storage capacity relative to current storage limits in other categories of petroleum. In the table below, you can see just that. Based on the data provided, we aren't anywhere near full here in the U.S. At the moment, for instance, distillate fuel is only 65.7% full while residual fuel, propane/propylene, and the "other" category of petroleum products stand at just 47.4%, 48.7%, and 48.8% full, respectively. Fuel ethanol is only 52.9% full so it also has a long ways to go.
An area that I am quite confused on relates to motor gasoline stocks. Based on storage data, combined with the EIA's weekly petroleum reports, it seems as though stocks there are the highest at 70.2% full. This is also nothing to worry about at the moment but could become an issue if motor gasoline stocks were to rise. However, when you use the inventory numbers provided by the EIA in its storage report, back when motor gasoline stocks were higher than they are today (244 million barrels vs. 238.6 million), their data shows that tanks are just 58.1% full. This is odd given how large the disparity is but I believe the difference here relates to the fact that their report does not keep track of storage outside of refineries and bulk terminals. A similar disparity exists here with distillate fuels.
Keeping my own calculations in place, total crude plus petroleum products in the nation (at the commercial level) are 59.2% full as of the time of this writing. This means that we have about 1.22 billion barrels of oil and petroleum products in storage outside of the crude pipelines (that's another 141.48 million barrels) but total capacity (excluding pipelines and other transit areas) stands at 2.07 billion. This leaves us with 843.88 million barrels in excess capacity. Adjusting for the motor gasoline and distillate fuel stocks, however, this number increases to 912.67 million barrels, implying that current storage is only taking up 56.1% of available capacity. This all excludes a further 299.31 million barrels of aggregate capacity that is included as shell capacity (it's difficult but not necessarily impossible to use) and another 56.98 million barrels of idle capacity that could be brought online within the next 90 days.
No matter how you stack it, there is nearly zero risk of crude or petroleum products, on the whole, filling up at the commercial level anytime soon. If anything, we have plenty of room to store petroleum and continued additions will likely lead to even more capacity being brought online in the future. Overall, this seems to indicate that investors should not worry whatsoever about aggregate crude or petroleum product storage capacity peaking, the likes of which would justify firesale prices and would almost certainly cause the price of oil to plummet.
Disclosure: I am/we are long AREX, MEMP, LGCY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My LGCY investment is in the form of preferred units, not common ones
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