In April, WTI crude oil futures slumped to negative prices for the first time ever. As demand dries up, are we running out of space to store oil? The US Energy Information Administration (EIA) is now including “crude oil storage capacity utilization” in its weekly status report, for investors to better assess current market conditions.
What is “storage capacity utilization rate”?
Crude oil is produced and transported through pipelines to tanks and underground caverns. Each tank is divided into three parts. The bottom is below the suction line where there might be sediments and water. The middle part is the working storage capacity. The top part is contingency space, and we have not activated this space yet. Three parts combined are known as Net Available Shell Capacity.
Working storage capacity is where crude oil is stored during normal operations, while the top and the lower part are not in use unless inventories exceed the maximum working level.
Unavailable space will not be utilized under any circumstances.
Net stocks include oil held in both above-ground and underground storage as well as pipeline fill to the refineries. And crude oil storage capacity utilization = net stocks / working storage capacity
Where are the tanks and caverns? Do they all have equal space?
There are five Petroleum Administration for Defense Districts (PAD District) across the United States and a total storage space for 650 million barrels of crude oil.
East Coast (PADD 1): 3 - 4%
Midwest including Cushing, Oklahoma (PADD 2): 26% including Cushing (11%)
Gulf Coast (PADD 3): 55 - 56%
Rocky Mountain (PADD 4): 3 - 4%
West Coast (PADD 5): 9 - 10%
These districts do not share space so oil can’t go from one district to another. Among all, PADD 1, 2 and 3 can influence the international oil price.
PADD 1 sits on the east coast where the refineries can easily import heavy crude oil from Canada and order shale oil from inland. The east coast accounts for 30% of the demand for gasoline, so the changes in its storage capacity utilization are worth noting.
PADD 2 locates in the mid-western America and produces the second most refined oil. Cusing city is the settlement point of WTI crude oil futures, so its oil stock level can cause fluctuations in the price of oil.
PADD 3 sits along the Mexican gulf with the highest concentration rate of refineries and produces the most refined oil. Most of the oil exports from the US dispatch from here; stocks rise when exports are delayed or cancelled, causing price volatility.
Does storage utilization rate affect oil price?
Based on the technicals, storage utilization rate of all districts need to stay between 40% to 60% for the oil price to rebound to 40$ to 60$ per barrel pre-COVID-19. But as soon as demand declines below such level, oil price might be affected.
As mentioned, storage utilization rate equals to net stocks divided by working storage capacity. Storage utilization rate rises as the oil market remains oversupplied. Among all PAD districts, stocks in the first, second and third are more influential than the others.
PADD 1 generates a huge demand for gasoline, so its storage utilization rate is indicative of the domestic demand in the short term.
PADD 2 is the settlement point of WTI crude oil futures, so its storage utilization rate affect the oil price. As oil stocks rise, oil price falls.
PADD 3 is the disturbution center of oil; its storage utilization rate reflects global demand. Stocks rising means demand is weak, then price falls.
Oil storage utilization rate reflects both domestic demand and global demand, especially PADD 1, 2 and 3. With utilization rate being in a range of 40% to 60%, oil price remains steady. Besides storage, consumption is another factor behind oil price, which needs to stay above 20 million barrels per day for oil price to gain more momentum.
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