Crude Storage Capacity Rising, Yet Utilization Rates Still Continue to Climb

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Written by Andrea Moede for Industrial Info Resources (Sugar Land, Texas)--Crude oil storage is certainly one of the less flashy segments of the Oil & Gas Industry. It is at times like these, however, that it comes to the forefront. With oil production booming worldwide (in large part due to the emergence of shale drilling) and supply regularly outpacing demand, storage capacity for the surplus is in high demand.

Click the image at right for a graph showing U.S. crude oil terminal projects by state.

This upward trend in crude inventories has been a factor since late 2014. Due to current low prices, oil futures actually have higher value than current sales. This contango trading situation has led many in the market to place more crude oil than normal into storage tanks.

The storage industry--including such companies such as Royal Vopak NV (Rotterdam, Netherlands), Kinder Morgan Incorporated (NSYE:KMI) (Houston, Texas), Oiltanking Partners LP (NYSE:OILT) (Houston, Texas), and Magellan Midstream Partners LP (NYSE:MMP) (Tulsa, Oklahoma)--has been able to capitalize on the high demand for their tanks. While exact numbers differ based on the storage location and contract length, crude storage fees that normally range from 20 to 50 U.S. cents per barrel have gotten as high as 80 U.S. cents per barrel for the most desirable locations.

Companies have responded to these trends, investing in capital projects to boost available capacity. From September 2015 to March 2016, the U.S. Energy Information Administration (EIA) tracked an increase in commercial crude oil storage capacity of approximately 34 million barrels; this is the largest crude storage increase since 2011, when the EIA began gathering this data. The Gulf Coast region added 13 million barrels, while the Midwest region added 19 million barrels. These two regions make up over 80% of domestic crude storage.

Expectations were that such large capacity increases would have been sufficient to handle the higher storage needs. This idea seems to be contradicted by recent reports, showing that capacity utilization rates also rose over the same time period. The Gulf Coast region had utilization in June averaging 72%; this compared to never topping 70% in the four years prior. Cushing, Oklahoma, (tracked separately than other regions as it is a major hub--the town has even dubbed itself the "pipeline crossroad of the world") saw utilization in June averaging 87%, up nicely from 81% over last year. And across the U.S., utilization rose from 61% in March 2015 to 66% in March 2016.

This data reveals that the recent capacity increases are not quite matching the spike in utilization, implying that opportunities in the crude oil storage segment may still remain. Much of this hinges, of course, on continued domestic production and inventory levels. For the four weeks ended September 23, total petroleum products supplies averaged over 20 million barrels per day, which is a 2.7% increase over last year. For the same week, crude oil inventories (excluding those in the Strategic Petroleum Reserve) came down by 1.9 million barrels from the previous week; while a smaller draw than in previous weeks, this still marks the fourth consecutive week of a draw on supply (rather than a build). Even so, this decrease still puts the current inventory of 502.7 million barrels at an unusually high level for this time of year.

The EIA measures the domestic capacity (including utilization information) twice a year, in formal reports for March and September. The new September 30 numbers should be released in November and will reveal whether these trends continued throughout the summer. In the meantime, Industrial Info is currently tracking 115 capital projects, valued at $9.47 billion, in the U.S. and Canada crude oil storage segment.

One factor that can affect North American crude storage rates is what OPEC decides to do with production levels. Prices jumped Wednesday on unconfirmed reports that OPEC had agreed to work on the first production cut in eight years.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.