There are now 503 million barrels of oil stockpiled in the US according to the Energy Information Administration (EIA). This is the highest supply seen for this time of the year in at least 80 years. Another sign that the US boom is still ongoing. It is all happening against a backdrop of crashing prices, from $107 per barrel in June 2014 to just over $30 per barrel now.
Domestic oil production may have slowed down, but only barely. Stockpiles of oil are now so high that they are testing storage and logistical constraints. Cushing, Oklahoma is where most of the oil produced in the US ends up, and this storage hub is currently up at 64 million barrels of oil, representing 87% of the facility’s capacity, a near-record high. “There is a fear of tank topping in Cushing. We’re seeing it get to its brims,” according to Matthew Smith, director of commodity research at ClipperData. If the Cushing trading hub runs out of storage and oil has to be diverted elsewhere he warns there would be a ripple effect across the US that would impact prices everywhere.
It is not just US inventories that are high; global inventories remain high as well according to the EIA, going as far as to say recently that the world is drowning in oil. An oversupply of 1.5 million barrels per day is expected in the first half of this year. Many on Wall Street see such supply constraints having big effects on prices. Oil is very vulnerable to operational stress because of the expensive and sophisticated infrastructure that is needed for its storage.
“Each time the market brushes up against infrastructure constraints, oil prices will likely spike to the downside to make oil supplies back off. By comparison, it’s relatively easy to pile up unwanted metals in an open space like a warehouse. Aluminum only needs a grassy field,” according to a Goldman Sachs representative.
Meanwhile, OPEC countries continue to pump oil without showing any signs of scaling back as they try to avoid losing market share to higher cost producers both in the US and elsewhere. It had broadly been expected that US shale drillers would cut back production when prices started falling. Data collected by the EIA paints a different picture; the US pumped 9.32 million barrels per day in November. This was up by 1% compared to the previous year and only 4% from the April 2015 peak.