Twice each year, the EIA (Energy Information Administration) releases interesting oil storage data. By examining this data, we can get a glimpse into the storage picture in the US, which may give us some indication not only of what kinds of factors may or may not dictate prices, but could also give us an idea of any risk areas to keep in mind. In what follows, I will dig into the data provided and give my thoughts on what it means for investors in companies like Whiting Petroleum (NYSE:WLL), Chesapeake Energy Corp. (NYSE:CHK), Approach Resources (NASDAQ:AREX), and Legacy Reserves (NASDAQ:LGCY), as well as for the United States Oil ETF (NYSEARCA:USO) and other oil-related ETFs moving forward.
A general fear of high inventories
In the past, one fear from oil bears that I encountered was that, with the rise in US production combined with OPEC policy that was combative instead of accommodating, the US risked running out of storage space to put it all. In recent months, despite seeing crude and product stocks hit their all-time highs, I haven't seen the same kind of concerns but this is likely driven by the fact that OPEC and some non-OPEC nations like Russia are willing to battle the glut.
The mindset facing bears is that high inventories could lead to storage space in the US running out or coming awfully close to it. If this were to happen, then the end result would be firesale prices of crude and petroleum products. Because of the price elasticity of demand of oil, however, the drop in prices in order to entice higher consumption to the degree that it would solve the excess levels would be significant. In theory, prices could drop incredibly close to $0 in that kind of scenario.
How are inventories looking?
Even though OPEC and non-OPEC nations have dedicated themselves toward reducing excess inventories, there's still no doubt that record high (or close to it) inventories makes this a very relevant issue. To see whether we are, in fact, in danger of a firesale kind of scenario at any point in the near future, I decided that it would be wise for me to create the graph below. In it, you can see how full, as a percent, the different categories of petroleum products (including crude) are.
*Created by Author
The first bar for each product category looks at what is called Working Storage Capacity. This is how much storage capacity is generally available. However, the second bar looks at shell capacity, which is a measure of working storage capacity plus the excess air space at the tops of tanks (to avoid overflowing) and anything like water or sludge that may be lingering at the tank bottoms. The final bar for each category shows all of the shell capacity, plus any extra capacity that should be brought online over the next 90 days.
What you can see by looking at all of this is that, across all categories, inventories are actually quite low at the moment. Yes, we do have a lot of oil and product in storage compared to where we've been historically but the fact of the matter is that, on the whole, we are only 56.7% full (48.6% at the low end). Some categories, like propane/propylene and "Other" at 29.2% and 44.8%, respectively, have fairly low inventory levels, and motor gasoline has the highest at 68.4%, but even that's not too high that it warrants a concern in my opinion.
What about Cushing?
The data above covers the entire US inventory picture but it does not cover one critical area: Cushing. Known as the oil hub of the US, Cushing, Oklahoma is often seen as a barometer for the rest of the industry. Even if inventory levels are manageable in other areas, a massive glut in Cushing could still cause the market to panic. This happened last year and I recommend you read my thoughts about it in the article here.
*Created by Author
Using the EIA's data, I decided that it would be a wise idea for me to chart out all three storage capacities in Cushing and compare those to how much oil is stored there today. What I found can be seen in the graph above. What you can see by looking at this is that, surely at 86.8%, crude inventories in Cushing are pretty darn high. In fact, if you look at historical data dating back a few years, you'll see that we are higher now than we have been in many prior years. However, even with this excess in Cushing, if you factor in Shell and even Idle capacity, the picture doesn't look too terrible (though relying on the full amount of this wiggle room may be risky since tank bottoms may not be able to be fully utilized). At the low end, capacity drops to 75.8%.
*Created by Author
Based on the data provided, there's no doubt that we are still experiencing an oil glut at this moment and inventories probably are higher than the market would like. Even so, when you look at the data from an unbiased perspective, the situation isn't all that bad. Sure, the levels seen in Cushing are elevated and we do need to watch there since continued growth in supplies could send a surge of panic throughout markets. However, I doubt matters will materially worsen there thanks to efforts by OPEC and non-OPEC members like Russia. Needless to say, if the glut outside of Cushing is considered, storage is nowhere near full, so that's not even a concern for now or the foreseeable future.
Disclosure: I am/we are long LGCY, AREX, WLL.
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: I own LGCYO and LGCY