07 Jan We Need to Think About Oil Storage Data Differently
The amount of oil in storage is one of the most commonly referenced data points that drives oil prices. Crude storage statistics are widely available and regularly disseminated. Even in parts of the world where data isn’t readily disclosed, satellite images can approximate how much crude is in storage. As with many types of data, this increased access to information doesn’t necessarily mean that people are using it correctly. In fact, two distinct trends indicate that the markets are overestimating the ability of storage alone to meet demand.
The Five-Year Historical Average Benchmark
Storage numbers are benchmarked against the five-year historical average for the given time of year. Market participants feel crude dynamics are tight when inventories drop below this five-year average. Similarly, they believe the market is oversupplied when storage trends above the average. While this analysis would make sense in a stable market, global oil demand continues to grow and is expected to exceed 100 million barrels per day in 2019. This is a significant increase compared to 2014, when oil demand was a little less than 93 million barrels a day. This means that storage levels are not truly equivalent to years past, as the same level of storage these days would get consumed far quicker. To account for this, we prefer to think of storage in terms of days of demand in storage. This is essentially how many days of global oil demand could be supplied with just crude in storage. When expressed in these terms, it is clear that the market requires additional storage year over year to ensure the same level of supply certainty.
The Infrastructure Requirement
Although the US storage number is the most closely watched, US storage is not as readily available to meet demand as it once was. A certain amount of US crude is required to remain in pipelines and tanks for them to operate effectively. US crude production has increased from 8.8 million barrels per day in 2016 to an expected rate of over 12 million barrels per day in 2019. This build-out of US crude production capacity has required significantly more pipelines and tanks, all of which require a certain amount of product to remain in the system to function. In addition, the import/export mismatch in recent years has further increased the new infrastructure required beyond what would be suggested by production levels. At the end of 2015 the US lifted a 40-year ban on crude exports. Since this time, exports have grown steadily. The US now exports approximately 3 million barrels per day of oil, while imports remain high at 7 million barrels per day. This product mismatch is primarily due to quality variations, as gulf coast refineries often require a heavier barrel than the US naturally produces. This means that the US constantly uses both significant import and export infrastructure (i.e. terminals, and associated pipelines). All of these assets require a certain amount of product, in perpetuity, to function. Duplicative infrastructure, due to product quality mismatches, means that every newly quoted crude storage number contains a larger component that could never actually be accessed based on the usage requirements of a growing crude infrastructure network.
The two examples discussed above show that oil storage numbers alone are not an accurate representation of the amount of product actually available to the market. The backward-looking five-year comparisons are more appropriate for a stable market and a little worrying for a global market that continues to grow rapidly. The crude oil required to operate the rapid US infrastructure build-out is also crude that must remain in the system and is not truly available. Both of these examples suggest a market that would be much tighter during a supply shock than currently perceived.