A Pirate Looks at Storage? The Caribbean Crude Storage Market

With crude storage tanks along the U.S Gulf Coast nearly full, the nine storage terminals currently operational in the Caribbean offer an advantageous close-by alternative. Right now these terminals are heavily used by Venezuela for oil blending and distribution, but there has been growing interest and investment from outside the region. China is now neck and neck with the U.S. as the world’s largest crude importer and is making a significant strategic investment in Caribbean storage to cement crude supply deals with Latin American producers. Private equity fund ArcLight Capital and trader Freepoint Commodities together purchased a huge terminal and shuttered refinery in the U.S. Virgin Islands in January of this year (2016) and have leased most of the working storage to Chinese-owned Sinopec. Today, we examine the growing role of Caribbean crude terminals. (This blog is based on Morningstar’s recently published Caribbean Crude Storage Outlook [1], which provides a comprehensive analysis of this evolving market.)

Crude oil prices have dropped by about 50% since June 2014 to around $45/barrel in the face of a global supply surplus. Falling prices led to a contango market structure, which encourages crude storage because prices for future delivery are higher than today’s price (see Skipping the Crude Contango). As a result of the contango market and other supply/demand dynamics, crude inventory levels in the U.S. and overseas have risen to record levels in the past six months. Although total U.S. commercial oil inventories have retreated by about 3% from their late April 2016 record high of 544 million barrels (MMbbl), they are still 33% above their five-year average for this time of year. Crude inventory levels in the Gulf Coast region also reached record levels (286 MMbbl) this April and are still 39% above the five-year average. To accommodate increased demand for storage capacity, the Energy Information Administration (EIA) reports that Gulf Coast storage capacity increased by 13 MMbbl between September 2015 and May 2016 (see I Still Haven’t Found All the Crude I’m Looking For). More new-build storage capacity is on the way – including an 11-MMbbl salt-dome underground storage facility in Houston being developed by Fairway Energy Partners.

Given all that’s been going on, Caribbean terminals represent a working alternative to U.S. onshore storage. The islands have nine operational crude and refined product terminals (Figure 1) with nameplate storage capacity of more than 140 MMbbl of oil – roughly 50% of current Gulf Coast crude inventory. Although most of the working tanks are leased, some facilities are not being used and/or are in need of repair, and these are attracting interest and investment from equity capital as well as Chinese companies. Caribbean terminals have market advantages over onshore tanks in the U.S. Gulf Coast region. For one thing, most Caribbean harbors are deepwater ports, meaning they can accommodate the largest oil tankers – 1-2 MMbbl Very Large Crude Carriers (VLCCs) and 2-3 MMbbl Ultra Large Crude Carriers (ULCCs). The Louisiana Offshore Oil Port (LOOP) terminal (see The Great Beyond) is the only U.S. port that can accommodate vessels that size. Caribbean terminals also are close by to the Gulf Coast, where 50 refineries can process as much as 9.3 MMbbl of crude/day. And the Caribbean is strategically placed at the crossroads of international crude trade routes.