I Still Haven't Found All the Crude Storage I'm Looking For - An Update

More new crude oil storage capacity came online in the U.S. in the fourth quarter of 2015 and the first quarter of 2016 than in any half-year period in memory, and still more capacity is being planned. Even with all this new capacity—and the slowdown in crude oil production—the storage utilization rates at Midwest/Mid-continent and Gulf Coast tank farms, underground salt caverns and refineries are at or near record highs too. And tens of millions more barrels of storage capacity are on the drawing boards in anticipation of further incremental needs. But the energy sector is pulling back, right? What gives? Today, we begin an update on crude storage trends and crude storage facilities in Petroleum Administration for Defense Districts (PADDs) 2 and 3, which together account for 82% of U.S. crude storage capacity.

According to a May 31 (2016) report by the U.S. Energy Information Administration (EIA), 34.3 MMbbl of “working storage capacity” for crude oil became operational at refineries, tank farms and underground storage caverns between October 1, 2015 and March 31, 2016, bringing the national total to a whopping 585.5 MMbbl. (Working storage capacity, as defined by EIA, is the difference between the bottom of a tank or cavern and the maximum safe fill line—in other words, a fair representation of what a storage facility could reasonably hold.) Of the 34.3 MMbbl of capacity added in that recent half-year period, 18.7 MMbbl was in PADD 2, a 15-state region (from Ohio south to Oklahoma and west to North Dakota) that includes the Cushing, OK storage and distribution mega-hub and that now has 162.5 MMbbl of crude storage online—50% more than it did five years ago. Most of the rest of the storage capacity added in the fourth quarter of 2015 and first quarter of 2016—12.8 MMbbl—was in the six-state PADD 3 (Texas to Alabama, plus New Mexico and Arkansas), which now has 315.1 MMbbl of capacity in operation (28% more than it had five years ago; see Figure 1). At first glance, you might think: 1) that the new storage capacity coming online must represent the last batch of storage projects planned and committed to before oil prices collapsed in late 2014, and 2) that surely this new capacity isn’t needed now as much as its developers had anticipated when they decided to build it. In fact, though, according to EIA, the national capacity utilization rate for crude storage facilities stood at 66% as of April 1 (2016), up from 59% six months earlier, and higher than any period in the past five years. In PADD 2, the capacity utilization rate stood at a near-record 68% (up from 65% as of October 1, 2015), and in PADD 3 it hit a record 67% (way up from 58% last October 1).

This rising need for crude oil storage capacity might seem to some to be at variance with the recent decline in U.S. oil production. But there are many reasons why more storage capacity might be desirable, including blending opportunities, the need to replace de-facto storage from overseas imports (discussed below) and the potential for taking advantage of market pricing that is in contango (a condition where future prices are higher than today). Let’s look first at what’s been going on in PADD 3—the Gulf Coast—which as we said is home to 315.1 MMbbl of crude storage capacity, or 54% of the national total. As Figure 1 shows, total working storage capacity in PADD 3 has been rising sharply the past five years, from 246.5 MMbbl in March 2011 to 315.1 MMbbl now. Virtually all the gains have been in the tanks/underground storage category (red portion of bars), which increased from 176.7 MMbbl in March 2011 to 240.9 MMbbl in March 2016. Refinery storage capacity (blue portion of bars) has increased more gradually, from 69.8 MMbbl in March 2011 to 74.2 MMbbl in March 2016. The utilization of total storage capacity (black lines within bars) has been heading higher, hitting 67% as of March 2016.