The Most Irrational Oil Fear

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Includes: OIL, USO
by: Daniel Jones

Summary

Along with slowing demand fears and a persistent glut, there's plenty of fear to go around concerning oil.

One category that is being way overblown, however, relates to fears that oil storage is nearing full capacity.

While oil inventories are hovering near all-time highs, the fact of the matter is that tanks aren't even close to be full.

This removes the possibility of a firesale in this space and suggests that investors should be focused more on supply and demand moving forward.

Earlier this year, I wrote about the oil storage situation facing the U.S. and how data suggested that the oil situation wasn't anywhere near as bad as many investors may fear. Now, with total petroleum product inventories near all-time highs and with new storage data available, I figured it would be a good idea to jump back into the topic in an effort to see whether the situation still looks positive or whether investors in the oil space should be scared of what is going on.

A look at how storage data works

As in the past, I figured it might be a good idea to show my readers the ins and outs of the storage data provided by the EIA (Energy Information Administration). The organization reports two separate types of storage capacity; net available shell capacity and working storage capacity. In the first type, the organization looks at the absolute maximum amount of storage space that can be used up before no extra product can be added into the mix. Working storage capacity, on the other hand, looks at the amount that can be stored without factoring in contingency space and without looking at any additional space at the tank bottom that exists. You can see an image below, which provides an illustration of the differences between the two types, courtesy of the EIA.

For the sake of conservatism, I will use the working storage capacity data in this analysis but it is important to know how much extra petroleum product could be stored if push came to shove (a true and massive glut). In addition to the data we will look at below, using the net available shell capacity definition of storage space would result in an extra 306.9 million barrels of petroleum product capacity that could, in theory, be tapped. Adding in idle capacity (estimated storage capacity that could be brought online within 90 days), we would see capacity grow by a further 60.7 million barrels.

We aren't even close to full

At this point in time, the EIA projects that there exists about 551.2 million barrels of working storage capacity for crude alone. With crude storage standing at 484.8 million barrels, this implies that storage is about 87.9% full. While this may look alarming at first glance, however, the EIA has stated that about 120 million barrels of crude is held in pipelines at any given time and are, in essence, flowing through the product channel instead of actually being stored. Because of this, these barrels should not be counted in the storage capacity data they provide. After taking these from the equation, we see that crude oil storage is only 66.2% full at 364.8 million barrels, well below the point where investors should be concerned.

Of course, crude isn't the only area of concern that should be addressed. In theory, if a large glut occurs in any petroleum product category, it could warrant a sharp downturn in prices for crude as a whole. To account for this, I looked at motor gasoline, fuel ethanol, distillate fuel, residual fuel oil, propane/propylene, and the "other" categories that are covered by the EIA. In the table below, you can see what the situation looks like for each type of product in terms of working storage capacity, how much product is currently in storage, and the ratio of stored product to storage capacity.

Across the entire spectrum, we don't really see any problem areas that investors should have to worry about. If the EIA data is accurate, total crude plus petroleum products stands at just 56.4% full, with the "Other" category at a low of 44.9% utilized while crude oil is at the worst. Motor gasoline, one category that I think is extremely important since it is one of the largest sources of oil consumption in the U.S., is only 59.2% full at 220.5 million barrels. Please keep in mind, once again, that none of this includes the excess capacity available should push come to shove. On a side note, this casts a very interesting light on stories that tankers full of crude are full and merely sitting out at sea. While this could be the case in some countries, any significant amount of oil tankers sitting out at sea around the U.S. would signify either inefficiencies in storage practices or they are being used for short-term strategic purposes.

Takeaway

At this moment, markets seem to be very pessimistic regarding oil and I do understand why. Personally, I believe the situation is overblown and that the future for crude will grow bright sometime in the not-too-distant future but anything can happen in the short-term. What we do know is that there are factors that can drive the price of oil down (increased production, falling demand, significant economies shrinking, etc...) but one thing that simply cannot drive the price of oil down from current levels anytime soon would be the U.S. running out of places to store oil. Depending on your definition of storage capacity, the country has somewhere between 915.37 million barrels and 1.28 billion barrels of extra space for all petroleum products combined. No matter how you stack it, that's a lot of extra space.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.