The Oil Boom Shifts to the Storage Business

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Low oil prices are hurting oil producers while the oil storage business is riding high. According to the US Energy Administration, an extra 11 million barrels has been added in the US by oil refiners, traders and logistics companies between March and September.

The numbers are even more impressive when looking at a longer timeline; since September 2011 the total storage capacity for crude oil has jumped by 19 percent or almost 84 million barrels. Most of that storage capacity has been added by tank farms, with the bulk capacity added in Gulf Coast states followed by Midwestern states. Commercial storage is big business not only in the US but across the world. Storage capacity has been expanding outside the US with major hubs in Singapore, the Caribbean and South Africa. The majority of firms in the storage business keep a low profile and are either unlisted private firms or subsidiaries of oil companies. One notable exception is Vopak, which has storage space around the world and is listed on the Amsterdam stock exchange. Oil storage presents a unique challenge (ranging from needing specialist tanks over requiring a pipeline network to strict regulation by governments) and is very capital intensive making it a small community that is rather closed off.

Demand for storage has grown from 465 million barrels in September 2011 to 551 million barrels in September 2015, and this expansion is expected to continue in 2016. On top of working storage there is a need for operational storage; i.e., maintaining flow to refineries, settling out water and the blending of crude for mix optimization. The increased oil production in the US has given rise to operational storage demand, but some storage increases have been used for speculation, more specifically for when the futures price (or forward price) of crude oil is higher than the expected spot price. This is also called the market being in contango. It allows for a relative risk-free strategy where the profits are the difference between the spot price and the forward price, with interest and storage fees being the only costs. Interest rates being close to zero means that the crude oil owner and the storage space owner get most if not all of the price difference. Since 2011, the market has been in contango 3 out of 4 days and since the beginning of 2015 the market has been in contango every day, with an average price difference of 65 cents per barrel.

As a result, oil storage has become very profitable as traders buy as much physical crude as possible only to send it to tank farms prompting a boom in the construction of new storage space.

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